UPDATE! Labor Laws: New Overtime Rule Suspended. What Now?
UPDATE: Earlier this year, the United States Department of Labor made a significant change to the overtime rule, and that change was set to go into effect this December 1, 2016. Overtime pay is the compensation due to an employee who works more than 40 hours in a given week and is paid at a rate of 1.5 times an employee’s regular hourly wage.
However, on Tuesday, November 22, 2016, a federal judge in Texas suspended the implementation of the new overtime pay rule. The ruling came in response to a case brought by a coalition of 21 states, which had been consolidated with another suit filed by various business groups, including the National Federation of Independent Business (NFIB). The suit alleged that requiring employers to pay time-and-a-half to employees who worked more than 40 hours in a given week and earned less than $47,476 a year would hurt small business.
The United States Labor Department issued a statement “strongly disagree[ing] with the decision by the court, which has the effect of delaying a fair day’s pay for a long day’s work for millions of hardworking Americans. The department’s overtime rule is the result of a comprehensive, inclusive rule-making process, and we remain confident in the legality of all aspects of the rule. We are currently considering all of our legal options.”
Under the now-suspended rule, not all employees would have qualified for overtime pay. Currently, only employees making less than $23,5600 per year are eligible. What would have changed this December 1? The number of workers who would qualify for overtime pay would have risen dramatically, as the threshold got bumped to employees earning less than $47,476 per year.
The ruling leaves employers and workers in suspense as to what the final status of the overtime rule will be, but for now, the overtime rule will not go into effect on December 1, 2016, and there is no telling when it might—if it will at all. According to The New York Times, the results of the presidential election had already thrown the survival of the rule as originally written into doubt.
Not so fast
But, business lobbyists had “had anticipated a legislative compromise that phased in the new limit over a longer period of time and eliminated an automatic increase in the limit every three years.” If the federal judge’s injunction stands, that sort of compromise becomes less likely. This is despite the fact that, as the Times reported, senior vice president for government relations at the National Retail Federation, David French, said that “his group and many other business organizations were open to some increase in the limit,” an increase being, French noted, “12 years overdue.”
Many larger employers may actually be sympathetic to a compromise. Having determined that increasing some employees’ pay over the expected $47,476 limit would be the most cost-effective option, many large employers have already done so. Such a compromise would then, according to the Times, “effectively extend the salary increase to some of their small rivals.” As with so much this year, the fate of the overtime rule is uncertain.
If you’re unsure of whether or not any of your employees currently qualify for overtime pay—as there are provisions beyond the $23,660 salary threshold—read on.
History of overtime laws
Overtime pay became a labor standard in 1938, as part of the Fair Labor Standards Act (FLSA). The FLSA bill established the basic worker protections we’re all familiar with today: the 40-hour work week, the federal minimum wage, and overtime pay.
Since the FLSA’s inception, the standard work week is still 40 hours, and the minimum wage has (sometimes) risen to meet inflation. The overtime rule has remained fairly static, with occasional increases to the salary thresholds that qualify workers to receive overtime pay. The last such increase was in 2004.
Before that, however, the last increase was in the 1970’s. In 1975, overtime pay covered nearly 62 percent of all workers. Between 1975 and 2004, the number of workers covered by the salary threshold fell to a mere 7 percent of working Americans, as a result of inflation. The Obama administration saw this as an enormous disservice to American workers and directed the Department of Labor to revisit and potentially revise the overtime rule.
To whom does overtime rule apply?
The first question many small business owners ask is, “Does my business fall under overtime regulations by the FLSA?” If you have sales or income greater than $500,000 or are engaged in any interstate commerce (meaning conducting any business outside of your home state) than your business falls under the overtime pay requirements.
Now, which of your employees are covered by the new overtime rule? For now, any “non-exempt employee working more than 40 hours in a given week and making a salary of less than $23,5600 a year [and] who is not employed in an Executive, Administrative, or Professional function (EAP).” In that one sentence are three components that build on each other and determine who receives overtime pay. It’s essential to understand each of these components—1) non-exempt vs exempt, 2) salary, and 3) an employee’s duties—in order to determine whether or not you need to pay any of your workers overtime pay.
Non-exempt or exempt employees?
The first step to determining which of your employees, if any, qualify for overtime pay is identifying whether employees are exempt or non-exempt. Though it may seem counter-intuitive in this case, it’s the non-exempt employees who may be covered by the new overtime rule.
In general, the work of exempt employees directly affects the company’s management, and these workers have authority to make independent decisions affecting the company. Alternatively, non-exempt employees don’t engage in work that requires them to make independent decisions or regularly use their own judgement regarding their work. So, for small business owners, this typically means that non-professional and non-managerial roles are going to be non-exempt. Those employees will qualify for overtime if they work more than 40 hours in a given week.
If you’re still unsure whether an employee is exempt or non-exempt from overtime pay, the FLSA provides two tests to see if an employee is exempt from overtime pay: salary and duties.
The salary test establishes whether or not an employee meets the overtime pay threshold. Currently, the threshold to qualify an employee for exemption from overtime pay is less than $455 in a given week or a salary of less than $23,660 per year. Employees being paid at or below those amounts will qualify for overtime pay, which means time and a half for all hours over 40 worked in a given seven-day period.
Given that many small business owners are more likely to have hourly than salaried staff, a simple measure might be assessing hourly pay. If you’re paying an employee less than $11.38 per hour, assuming a standard 40-hour work week, then they are below the pay threshold. Thus, unless they meet the duty test we’ll outline below, they are non-exempt and qualify for overtime pay.
The duty requirement
If you have employees who makes less than the salary threshold, but who are making managerial decisions that could be understood as executive, who are professionals with a certification, or who are engaged in the administrative functioning of a business, these employees may be exempt from the overtime rule.
Executive, Administrative, and Professional designations (EAPs)—sometimes referred to as white collar jobs—are fairly general, and it can be difficult to establish whether or not an employee does fall into one of these exemption categories. An employee only needs to fall into one of those exempt categories to qualify, but must satisfy all the requirements for that particular exemption.
The US Department of Labor’s guidelines for identifying EAP employees who might be exempt from overtime pay offers a little more detail. Several different kinds of professional employees may qualify for the professional exemption. For small businesses, it’s likely that professional employees will fall into one of two categories: learned professionals or creative professionals.
Managing overtime pay
If you’ve found that you have staff that fall under the non-exemption rule for overtime pay, as an employer, you have several options:
- Pay time-and-a-half for overtime work.
- Raise a worker’s salary above the threshold of $23,660
- Limit workers’ hours to 40 hours per week
- Or, some combination of the above
All the information above comes directly from the US Department of Labor. While this is as exhaustive as possible in such a short space, I absolutely encourage you to reach out directly to the US Department of Labor. (I called them myself, and they were very informative and helpful.) Folks there are available Monday through Friday from 8am-5pm EST at their toll-free number 1-866-4USWAGE (1-866-487-9243) or for hearing impaired at TTY: 1-877-889-5627.