Changes to the overtime rules that were supposed to go into effect in December 2016, but were delayed by litigation and changes in presidential administration, are now modified and finalized and scheduled to go into effect January 1, 2020. The Department of Labor estimates that 1.3 million workers nationwide will become newly eligible for overtime pay when the rule takes effect.
These changes will almost certainly affect small business owners, so it is important to understand them and possibly get legal review of your employment policies if you are in doubt about how they affect you.
The Cost of Getting Overtime Pay Wrong
If an employee files a lawsuit claiming they should have been paid time and a half for overtime hours and wins, you as the employer could be on the hook not only for the unpaid amounts but for two or three times the unpaid amounts, plus the employee’s costs and attorneys’ fees. That is on top of having to pay a lawyer yourself to defend the claim. So it is important that you understand the rules- old and new- and how they could affect you and your business.
Under the old rules, an employee could be exempt from overtime if they (i) are paid on a salary basis (the same amount each week or biweekly pay period); (ii) earn at least $455 per week, or a little over $23,000 per year; and (iii) perform duties that are considered “exempt” under overtime law (more on exempt duties further down).
The “salary basis” and “exempt duties” requirement has not changed, but the minimum earnings to be exempt from overtime have gone from $455 per week ($23,660 annually) to $684 per week ($35,568 annually).
The second change allows an employer to bring employees up to the minimum salary through the use of non-discretionary bonuses and incentive payments, so long as those payments do not represent more than 10% of the employee’s salary.
Why The New Overtime Rules Are Important
Prior to the implementation of the new rule, virtually every employee in Massachusetts met the salary minimum to be considered exempt from overtime, as $455 per week for a 40 hour week is less than $12 per hour, the current minimum wage in Massachusetts. The new minimum is the equivalent of a little over $17 per hour, so there should be plenty of workers in Massachusetts who right now earn enough to be exempt from overtime but will not by January 1, 2020. This means for anyone earning less than the minimum amount, they will have to be paid overtime for hours worked over 40 in a week no matter what their salary arrangement and no matter what kind of job they do for your company.
Why You Still Need to Pay Attention to the Old Rules
The minimum salary is only a piece of the puzzle. What has not changed are the old rules that also require the employee to receive regular, consistent amounts, and to be engaged in duties that are considered exempt. This means that even if your employees are salaried, they may or may not be exempt from overtime.
The list of specific exemptions under Department of Labor regulations is lengthy, but in broad strokes someone is exempt (meaning they do not have to be paid overtime) if they are a licensed professional (think lawyer, doctor, CPA, some nurses and some social workers), executive (supervising and managing at least two employees) or administrative (someone who supports the business in a role like HR and exercises independent judgment on matters of significance). If you are in doubt about your employees’ duties and whether they are exempt, it is important to consult a lawyer because the lines are not always clear between “exempt” and “non-exempt” duties.
What Small Business Owners Can Do
First, look at all of the people who work for you who at times put in more than 40 hours a week. If their regular salary is less than $684 per week, without doing any further overtime analysis, you already know that you will have to either increase their base salary (or catch them up with nondiscretionary bonuses or incentive pay), find a way to control whether and when they are working more than 40 hours a week, or resign yourself to paying time and a half for hours worked over 40.
You can control hours, by having and enforcing a policy that requires management approval to work more than 40 hours, and by implementing time reporting that allows you to monitor the time put in by your employees. You may occasionally have to pay out overtime if something slips through the cracks, but you can avoid having potentially owed amounts add up over a long period of time.
You can use one time payments to bring people up to the required minimum salary. Because this rule is so new, there is little guidance on how it will be interpreted, but typically a “non-discretionary bonus” is something that is tied to an objective metric- commissions, or specific amounts paid out when a person, team or department meets certain milestones in the business.
Even before the rules changed, overtime laws were often confusing for employers, especially small business owners without a full HR department or in-house counsel. We can help- give us a call at (413) 667-2322 for a free, no obligation consultation to help you understand if you need to make any changes to your employment policies before the new year.
Emily Smith-Lee is an attorney and owner and founder of slnlaw.