Federal wage laws apply to every business, no matter how small. So as a small business owner, you’ll need to keep on top of the wage and hour rules and regulations. Several recent changes in federal wage laws, especially overtime rules, may have an impact on your small business – let’s take a look at the current landscape of federal overtime laws and how to adapt your business for compliance.
General Overview of the Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) is a federal law setting out the overtime rules for workers. Under the FLSA, all employees ages 16 or older must receive overtime pay for hours worked over 40 hours per week. That overtime pay must be at least one and a half times the regular hourly rate – “time and a half.” Note that the only measure that matters is whether an employee has worked more than 40 hours in 7 days. You are not automatically required to pay overtime for work on holidays or weekends.
The FLSA doesn’t impose a limit to the number of hours an employee may work during the work week – if they work overtime, you’ll have to pay overtime no matter what. And you must pay overtime wages from a particular week at the same time as you pay regular wages for that period.
Recent Changes to Federal Overtime Rules
President Obama announced extensive changes to the federal overtime rules on May 18, 2016. The Department of Labor’s update to the current overtime rules automatically extended overtime pay to more than four million workers. The intention of these new rules is to ensure that all workers are fairly paid for their long work hours.
The new overtime protection laws apply to workers earning less than $47,476 per year. The new overtime laws also remove certain long-standing exemptions.
Formerly employees were excluded if they were salaried, earned more than $23,660 per year, or were in executive, administrative, or professional positions. These exemptions will be lifted, and the pay threshold for overtime protection will be raised to an annual salary of $47,476. The pay threshold will be revised and updated once every three years. The new overtime rules will go into effect on December 1, 2016. At that time, the new rule will amend overtime regulations under the FLSA minimum wage and overtime protections.
The overtime expansion laws will have signification impacts on small business owners and workers. Under the new laws, any employee who don’t make at least the threshold salary or classify as exempt are entitled to time-and-a-half pay after they’ve worked 40 hours in one week – even if they’re salaried or in managerial or professional positions.
What Do The New Overtime Rules Mean for Small Businesses?
Since the mandated changes won’t take effect until December 1, 2016, you still have time to review your practices and ensure that your business is in compliance with the law. Experts have opined that small business owners will be the ones who are most impacted by these changes, since small businesses may be more likely to have employees with salaries under the new threshold.
Now is the time to create uniform practices when it comes to wages, billing, and time recording in your office. Consider creating a written, comprehensive overtime policy that applies to all of your employees. Review these policies with your staff to make sure they understand the new laws and your policy.
You’ll want to address these questions:
- How will working hours be calculated?
- Does travel time count as working time?
- What happens if an employee works overtime without approval?
- Are employees allowed to work overtime at all?
Because the new overtime laws apply to workers that may not have set shifts, you’ll need to make sure you have a reliable system in place for tracking working hours. Are your employees required to clock in and out? Or do you have a formal online system in place to log hours? And whatever system you put in place, you’ll need to make sure your employees are sticking to it.
Do The New Overtime Rules Apply To My Small Business?
The FLSA does not apply to every small business. In general, it only applies to businesses with more than $500,000 in revenue or businesses involved in interstate commerce – that’s a broad definition and a large proportion of businesses will be covered by that rule.
In addition, certain kinds of employees may still end up being exempt from the new overtime rules. You’ll need to work with your attorney to determine who is and isn’t covered.
What Can Small Business Owners Do To Deal With The New Rules?
There are actionable steps you can take today to make sure your company stays above the law when it comes to federal overtime.
1. Go Paperless
Technology has opened the door for new ways to automate. One of the best uses of technology in a small business is recording hours.
Hand recording hours can open the door to human error (and take a lot of time!), but technology is generally more reliable. Automating hourly recordings is one of the best investments you can make to ensure your time records match up with your employees’ actual hours. Ask them to sign in when they start work and when they leave to keep an accurate measure. An automatic timekeeping system can also be set up to allow your employees to review their own hours and make sure they’re accurate.
2. Review Employee Titles And Roles
You want to clarify all employees’ roles within the company at least biannually. This allows you to keep current on what each person’s job descriptions require. That allows you to review how many hours per week the job entails. You may find that you have to make a choice between paying one employee overtime or hiring a second employee to share those duties.
You can also review the expected roles and hours at any time – like if you notice someone is clocking a large amount of overtime. It may be that they’re swamped or it may be that they’re not working as efficiently as they could be.
3. Consider Capping Hours
If you’re interested in capping hours, you can ensure that you keep your employees at 40 hours per week. Then you never have to deal with overtime pay. As you create your overtime pay policy, you’ll need to decide whether you’re going to allow overtime at all. You can also decide that overtime is potentially allowed, but only with prior approval. Or, you can decide that overtime is allowed no matter what (although you open the door to abuse of the system).
Whatever you decide, remember that you need to apply that policy across the board to all workers doing the same job.
4. Raise Salaries
Another way to circumvent any overtime issues is to raise employee salaries. By raising salaries above the new threshold, then you would avoid having to calculate any overtime hours. You’ll need to calculate how much overtime you expect to pay and determine whether the total will cost you more than $47,000. If it will, then it’s less expensive for you to simply raise that employee’s salary over the threshold.
5. Reclassify Workers
If you have hourly workers that earn more than the threshold, you may want to consider switching them over to salary. You’ll need to calculate the employee’s annual pay including expected overtime. If it’s more than the $47,476 threshold, then it’s cheaper for you to switch them to a salary that’s just over the threshold.
However, remember that this means your employee is going to make less money than they would if they stayed hourly, so you’ll have to consider whether it’s worth risking upsetting them.
If you have salaried workers that make less than the new threshold, it may be less expensive for you to switch them to hourly pay. You’ll have to adjust that hourly pay so that their regular hours plus expected over time work out to be the same as their old salary. They’re doing the same amount of work for the same amount of pay as before the overtime rules changed.
Again, your employees may not be happy with that change. The new overtime rules would have meant that they would be getting a raise, and reclassifying them takes that away.
Remember that if you do reclassify employees, they’re pay won’t be the only thing that’s affected. That change in classification may affect their bonuses, their benefits, and their flexibility at work. And while changing an employee’s classification isn’t illegal, you should probably only do it once – switching multiple times can throw up a red flag that you’re trying to avoid FLSA regulations. So talk to your attorney and accountant to decide how best to handle your policies and whether reclassification is the right choice for your business.
Applying The Overtime Rules To Your Business
These changes are coming in December and you’ll need to be ready. In some cases, the new overtime rules are going to increase your labor costs and you’ll need to make adjustments to stay in the black. Now is the time to start reviewing your overtime policies so that you’re ready when the new rules take effect.
And some states have their own additional overtime rules – make sure you talk to your attorney and accountant about making sure you’re in compliance with all of the relevant regulations.