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What Do the New Overtime Rules Mean for Small Business Owners?

In May of 2016, some of the federal regulations that apply to the administrative exemption for overtime pay changed significantly. These changes, which will be officially implemented at the beginning of December, are likely to have an impact on businesses all over the country. Here are a few highlights and examples of those rule changes:

Overtime Pay Basics

Federal regulations typically require employers to pay overtime wages, which are equal to at least 1.5 times an employee’s standard hourly rate, for every hour worked in excess of 40 hours per workweek. However, in some cases, employers can use the administrative exemption to exclude certain employees from this rule. In order to qualify for exclusion under the administrative exemption the employee must typically receive pay in the form of a salary instead of an hourly wage. The employee must also have a management-style job in which he or she does not perform manual labor, and the employee must earn a minimum amount of money per week.

How the Law Changed

Under the new overtime rules, employees must still meet the same requirements with regard to job description and pay structure in order to qualify for the administrative exemption. However, the minimum amount of money employees must earn each week has increased. Specifically, employees must now earn at least $913 per week in order to quality, as opposed to the previous minimum of $455 per week. This minimum salary requirement is set to be adjusted automatically every three years to ensure that it remains appropriate.  In addition to the exemption for employees, there may also be exemptions for executives and professionals.

Another change to the administrative exemption pertains to the way an employee’s salary is calculated. Under the old law, employers used only the employee’s base salary to determine whether he or she was eligible for exemption. After December 1, however, employers will be able to include bonuses and commissions to satisfy up to 10 percent of the minimum salary requirement for employees. Note that the 10 percent added to the salary must be paid on at least a quarterly basis.

Is Your Business Ready?

These new overtime law changes won’t affect every small business, but they are likely to cause problems for many. Under these new laws, you may find that you are required to pay overtime to a much larger number of employees than you once were. In order to avoid this expense, you may consider raising employees’ base salaries so that they qualify for the exemption. However, for some companies, this strategy may actually be more expensive, especially if you intend to keep up with the automatic minimum salary adjustments that will occur at regular intervals in the future.