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New Overtime Rules for Employees – What you need to Know

11/30/2016 – DELAYED!
As of right now, the new overtime rules do NOT go into effect tomorrow.   On November 22nd, a US District Court Judge in Eastern Texas granted an Emergency Motion for a Preliminary Injunction which stayed the implementation of the updated Overtime rule.

In my opinion (take it for what it’s worth) this is a double edged sword.   Would the new rule have hurt business?  Yes some, but mostly those businesses who were abusing the employee’s stated position (ie Manager, Director) to get around paying overtime to individuals who were earning a mere $10/hour while those same employees did not meet the Criteria to be considered Exempt from Overtime.   This new rule attempted to rectify that classification so that workers could not be exploited.

On the other edge of the sword are the workers themselves.   The new rule was an attempt to ensure that employees who did not meet certain managerial job duties were not miss-classified as managers denying these employees overtime pay for work over 40hrs.   This new rule didn’t say you needed to necessarily give your employees a raise if they were Exempt salaried, it merely helped to define a living wage for those who were working over 40 hrs and not compensated for that work.   An employer has 2 choices under the new rule – Either Pay overtime to employees that clearly are not Management (either by pay scale or duties) or Hire additional Labor to fill in the hours that were not being compensated under the old rule.   Assume this person was working 50 hrs a week and only compensated for 40 at $10/hr – 2 things happen under this scenario (1) the person’s hourly wage is effectively reduced to $8 when not compensated for the other 10 hrs (2) their time away from their family is effected and (3) something most probably don’t think about, resentment and employee dissatisfaction become an issue.   The later may be something that actually costs an employer more than if the employee were happy and enjoyed their job.

Stay posted to this page.   I will update this information when more is available.  But as of now, no changes are in effect regarding overtime pay.

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Effective December 1st, 2016, new Exempt Overtime rules go into effect.   As an employer you will need to start paying Overtime to your SALARIED employees whose salaries are under $47,476 per year and even if they meet the other regulation criteria to be considered exempt.

What the new legislation does is merely lift the pay threshold from $23,660 ($455/week) to the new higher threshold for anyone earning under $913/week.    You won’t necessarily have to change your Salaried employees over to hourly, but you will need to find some method of tracking those hours so that overtime can be accurately calculated and paid.

A bit of History on who could be classified as Exempt

You could classify an employee as exempt from overtime if they met certain job/pay related tests.   The main tests are the employment classification:  Executive, Administrative, Professional, Computer or Outside Sales.   On top of these general classifications, the employee would need to have a position of responsibility – managing employees, exercising discretion/judgement, have advanced knowledge among other related qualification type tests.   However, under each of the tests, the minimum weekly pay for each of the classifications was $455/week.   This had the tendency to lead to employees being misclassified as exempt from overtime even though, the employee may not meet the other Employment Classifications.

Keep in mind, you can and could still pay employees based a Base Salary even if they didn’t meet the exempt standards, but you were and are required to pay overtime (time WORKED over 40 hours in a given work week) to salaried employees even if they did not qualify for exempt status. The term “Salary” was not and should not be confused with being exempted from earning overtime pay.

How to implement the New Rules

Effective on Dec 1st, employers will be required to pay overtime to every employee who does not meet the Exempt Work regulations – those rules have not and are not changing.  What has changed is the weekly earnings in ADDITION to the exempt criteria.    The weekly minimum pay is being increased from $455/week to $913/week.

Attached (via this link)  https://www.dol.gov/whd/overtime/fs17a_overview.pdf  is the U.S. Dept of Labor fact sheet on WHO is exempted from overtime.  For any employees that you are not paying overtime to, you should review that employees job responsibilities to see it they meet the exemption standards for overtime.   If they do not, you need to begin paying overtime to the employees covered under this new change.   You may want to review these rules now to see if you are in compliance as you could potentially owe your employees hundreds (potentially thousands) if you have had them misclassified incorrectly all alone.   For those employees who do meet the job duty classifications but are under the new pay threshold, you have a couple options – (1) Raise that employees salary to an amount that exceeds $913/week, (2) Leave their salary as is but convert their Salary to hourly so their overtime hours can be easily determined or (3) Leave the Salary as is and weekly recalculate their hourly rate and pay overtime according to you state’s overtime rules.

What hours Qualify for Overtime

Overtime hours are those hours an employee WORKS in excess of 40 hours per week.  If your employee works 40 hrs but has 8 hours of vacation, the 8 hours of vacation is not Worked time and therefore no overtime is payable.   However, if your employee is continually working 45 hours per week, they will be due 5.0 hrs of overtime each Week – do not confuse this with pay periods.  If you pay on a bi-weekly period or some other pay period, you will need to determine if the employee worked over 40 hours in a given WEEK.

Example:  You pay your employees every other week (your pay cycle is Bi-Weekly).  Your employee who makes $15/hr and does not meet any of the exempt criteria turns in their time sheet for 80 hrs.  However, that 80 hrs consists of them working 45 hrs on week 1 and 35 hours on Wk 2 – The employee is entitled to 5 hours of Overtime pay for week 1 even though their total hours equal what would normally be 2 weeks at 40 hrs per week.

Each state has it’s own laws on what the overtime rate is.  Wisconsin is 1.5x the regular hourly rate.  Under these laws, in the example above, this employee would be paid 5.0 hrs at $22.50/hr for the overtime hours.   Some states may have laws which may 2.0x the employees hourly rate when/if hours exceed a given amount of overtime or if overtime occurs on a holiday.  Be Sure you know what your states Overtime pay laws are.

It’s important to understand that the employees who are entitled to overtime pay is NOT changing!  It’s only the amount that the already exempted employees earn that is being adjusted.   In other words, your employee meets the work related criteria to be considered exempt from overtime but they don’t meet the new pay threshold beginning on Dec 1st – this employee would now no longer be exempt simply because the pay threshold has changed.

LKM Accounting is here to help!  Feel free to give a jingle or shoot us an email.  We are happy to help small businesses understand the tax and pay laws.