Here's How the New Overtime Rules Will Affect Entrepreneurs

Here's How the New Overtime Rules Will Affect Entrepreneurs
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The federal Department of Labor today published its final overtime rules but, before you say or write anything about the final regulations, please take a deep breath.

The first thing to know is that for an employee ordinarily must meet three requirements to be exempt from receiving overtime under one of the white collar exemptions (executive, administrative, professional, etc.).

1. Minimum salary.

The current minimum salary is $455/week. The DOL had proposed increasing the minimum salary to what would have been over $50,000 per year. The DOL pulled back slightly in its final rules; the new minimum salary will be $46,475 per year or $913.00 per week. Yes, that is more than double what it was in 2004.

In addition, the minimum salary will increase every three years. Initially, the DOL had proposed annual increases.

2. Salary basis.

The employee must be paid on a salary, not hourly, basis. This means:

  • limited deductions are permitted for absences.
  • no deductions may be made based on quantity or quality of work.

One important change to the salary basis test: employers (for the first time) may use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the substantially-higher minimum salary.

3. Duties test.

The employee's primary duty must be exempt. Under current regulations, this is quantitative. Primary means the principal, major or most important. The DOL did not propose any specific changes to primary duty test. But it did ask a lot questions, suggesting that it would consider adopting a (harder-to-meet) percentage test.

Ultimately, the DOL did not change the primary duty test. With this background here are some do's and don'ts for adjusting to the new regulations:

Do keep legal challenges in mind when analyzing positions.

When you evaluate or re-evaluate some positions in terms of their duties, some will fall into the legal gray. Be careful of self-analysis that may be discoverable and hurt you in the event of a legal challenge.

I get it. Labor costs may soar as a result of the new regulations but do not create "smoking guns" that will hurt you in court. Be careful of what you say or write. You don't want to explain in court what you meant when you emailed “These regulations will kill us! We can’t increase salaries or pay overtime!''

Those emails will kill you in court, so think before you click "send."

The scope of the attorney-client privilege is deceptively complex. Without getting into the legal weeds, talk with your lawyer about how to structure the collection and analysis of data to minimize its discoverability. By the way, sending a “cc” to your lawyer does not make the communication privileged from discovery. It simply makes your lawyer a potential witness. Delightful.

Lastly, this is a federal regulation but don’t forget state law. Employees get the benefit of whichever is more favorable.

Related: Do You Have a Plan to Survive the Proposed Overtime Rules?

Don't immediately increase salaries above the ceiling.

You may be able to meet the minimum salary now. But will you be able to keep up as number goes up? Employee relations considerations come into play if you later convert the employee’s status to non-exempt. Plus, the cost of overtime may go up, discussed in more detail below.

Do carefully evaluate cost of retaining employees "as exempt."

As noted earlier, the minimum salary will go up every three years. What if you can’t keep up? If you convert an employee later to non-exempt because of the minimum salary increases or the position is found to be non-exempt based on a legal challenge, your overtime costs will be based on a higher base rate. Here is an example to demonstrate the point:

Assume an exempt employee currently makes $800 per week -- $20 per hour times 40 hours. If her rate is not increased and she is converted to non-exempt now, her overtime rate will be $30 per hour. Assume you raise that employee’s salary to the current minimum of $913 per week to keep her exempt from overtime, but further estimate that in six years the minimum salary is $1,200 per week. Money is tight so you convert the employee to non-exempt. Her hourly rate is $30.00, so that the overtime rate now is $45.00 per hour.

The cost of overtime soars.

Related: Should You Pay Employees an Hourly Wage or a Salary?

Keep employee relations top-of-mind.

Hourly employees do not have the same flexibility as exempt employees. Most exempt employees have discretion over when and where they work, so long as they get the job done. Convert them to non-exempt and that flexibility goes away. Employers must consider this, and other employee relations considerations, before converting an employee from exempt to non-exempt.

Do proceed cautiously.

The new rules do not go into effect until Dec 1. You have time to plan thoughtfully, so do just that. Do not rush!.

Start thinking….now.

This blog is not legal advice.