The New Overtime Rules

Note, the proposed 2016 salary threshold described below was overturned, however much of the advice below still applies.

(Originally written June 1, 2016 for The Hire Firm.)

The “overtime rule” – everybody’s talking about it, at least in the Human Resources world they are. It’s still the lead article of just about every HR newsletter I receive. But, if you’re a business owner or someone who touches payroll for your organization and you’re not talking about it, you should be.

Here’s a questionnaire to see if you need to care:

1. Do you have anyone on your payroll you pay a salary of $47,476 or less? (Meaning, they get paid that amount or less, in equal amounts every pay period, even if they work more than 40 hours per week.)

2. Do you have anyone on your payroll you pay a salary of $47,476 or more who does not handle matters of significance to your business?

If your answer is “no” to both of these questions, I have good news for you, you’re all set (at least for the next three years until the Department of Labor adjusts the salary threshold). I’ll assume everyone on your payroll is paid by the hour and is paid overtime if they work more than 40 hours in a week. Or, I’m assuming your people who are paid a salary over the $47,476 limit are performing a job that primarily requires they use discretion and make decisions and/or recommendations that are significant to your business.

If you answered “yes” to one or both questions, I’m gonna need you to take some action or you’re gonna have some ‘splainin’ to do come December 1st, Lucy. You don’t need to drop everything but you don’t want to be too “manana” about it either. It may take some calculating, decision-making, planning, and discussion.

I’ll give you some options to consider.

Make everyone hourly. You will break no law, even if you pay your highest-level executive by the hour. It’s not quite what the fathers of the 40-hour workweek had in mind, but I don’t think Henry Ford or FDR would be too put out either. Your high level execs might mind though. The person who cuts your paychecks may not appreciate the additional work of having to collect their hours each pay period, and your overtime budget may go through the roof.

You might be asking, “If I can make the CEO hourly, why can’t I make the receptionist salaried?” Because the receptionist is not exempt from earning overtime, he is non-exempt. According to the DOL he probably would not pass the test to be exempt from earning overtime.

Now, you might be asking, “What test?” There are tests to determine whether or not an employee is eligible to be exempt from earning overtime. Unless the employee works for you as an executive, an IT professional, a learned professional (like an artist or scientist) or an outside salesperson, the test to use is called the Administrative Test. (Google “FLSA Duties Tests” to find simplified versions of the tests.)

The tests are in two parts. The part that is not going to change is the duties part of the test. The duties part changed in 2004. That’s “recent” in DOL years. Basically, the consideration is whether the employee, in carrying out his primary duty, uses discretion and independent judgment. For example, does the receptionist have the authority to negotiate on behalf of the business, to implement or deviate from standard practices? Is he expected to analyze and give you expert advice on how to reach business goals? Though he may want to and tries to operate on this level, that is not what you primarily expect and ask for him to do. The answer to the duties test for your receptionist is probably “no.”

Maybe these duties sound more like your office manager. She operates more like an operations manager, even though her job description reads like all she does is buy office supplies, and turns the lights out. You must go by the duties the employee actually performs even if the job description does not reflect that. You don’t have any job descriptions? That’s for another blog. First things first.

So, your receptionist does not pass the duties test but your office manager does. Let’s see if they pass the salary part of the test. This is the part that is changing come December 1. Currently, it asks if the employee earns $455 per week gross. That’s just $23,660 per year, or $11.38 per hour. Sure, your receptionist has been with the company for six years and you take care of your people. He gets more than minimum wage. He wants to be salaried, it’s prestigious. He doesn’t often work any overtime, maybe two extra hours a month. Your office manager’s salary is $42,000. She passes as well, until December 1st.

In order to be exempt from earning overtime, they need to pass both parts of the test, so your receptionist is non-exempt. He is not exempt from earning overtime; he is eligible to earn overtime. You can’t pay him a salary by calling him exempt, he’s not. Now you know. Time to start paying him on an hourly basis, for all time worked, including time and a half for those two or so hours a month he goes over. He may not understand or care that according to the DOL he should have been hourly all along, he would prefer to stay salaried, and you’ve let him be salaried for years. Why change now?

One, you can tell him Obama is making you do it (“Thanks, Obama!”) and that the big, bad DOL is going to be looking for cases just like his come December 1. Two, you can tell him this is the exact reason you wouldn’t promote him to a position that would pass the duties test. If he can’t interpret regulations, see how they apply to your business and advise you to follow them, then you can’t have him making decisions and negotiating on your behalf. Three, willfully continue to classify him as exempt because he thinks it’s cool. Knowingly continue to not pay him the two hours of overtime per month. Explain to the DOL that you allow your employees to decide whether or not they are exempt and pay a fine of the back overtime owed multiplied by a penalty for willfully and knowingly continuing this practice. Or, four, you tell him that due to the upcoming changes you’ve become aware of the correct application of the regulations, and the right thing to do is to start following them immediately or you may be facing fines. Give him a nice bonus equivalent to the two hours of overtime per month for six years that you should have been paying him all along, and include a note explaining that in his file.

How about your office manager? She will continue to pass the duties part of the test, but come December 1st when the salary part is raised to $47,476, she will not. She’s only been with you for nine months but is even more hardworking and loyal than you could have imagined. If her salary is not raised from $42,000 to above $47,476, you will need to start paying her overtime for the tireless and countless hours she spends staying late in the office.

You can keep her at $42,000 a year, but on a non-exempt, hourly basis. Divided by 2080, (the number of working hours in a full time year: 40 hours times 52 weeks) that is an hourly rate of about $20.19. However, if she works three and half hours per week overtime, which she surely does and you need her to, she’s going to be earning close to the $47,476 anyway. So, consider raising her salary to over the $47,476. She will pass the salary part of the test as well as the duties test. The DOL would agree she is exempt from earning overtime. She’ll get paid the same amount every pay period and won’t need to track her hours.

What if you can’t afford the extra 5.5K a year? Then you’ll need to tell her to stop working so much overtime. What if she says she wants to work the overtime anyway, she won’t log it, she doesn’t want you to pay her for it, can you give her a little extra vacation or discounts instead? That’s not her decision, the DOL says if you don’t pass the test, you are non-exempt and must get paid for all time worked, with real money. If you think about it and decide the extra work she does directly or indirectly results in sales or savings of 5.5K or more per year, you might as well give her a raise and call her exempt.

How about your receptionist? You’ve told him he’s non-exempt and you want him to limit his overtime, and only work it if it is pre-approved, but he’s still working it anyway. Don’t punish him by not paying it, that’s illegal. You must pay non-exempt hourly employees for all time worked. You have to pay him for it, but that doesn’t mean you can’t manage to it. He’s breaking your policy; the one in your handbook that says all overtime must be pre-authorized. You do have an up to date handbook, right? No? Well, let’s save that one for another blog as well.