New Overtime Laws Impacting Small Business & Startups

In a few short weeks, most startups and small businesses will be required to either raise the salaries of employees making less than $47,467.00, or else risk paying overtime wages.

Effective December 1, 2016, updates to the Fair Labor Standards Act are significantly limiting the category of employees who can be classified as “exempt” from compulsory overtime laws.  Unless employers are prepared to meet the new salary threshold, employees who were previously ineligible for overtime pay will now be categorized as “non-exempt” and entitled to time and a half for any hours worked in excess of a 40 hour work week.

The key updates can be summarized as follows:

• The Department of Labor has set the new standard salary level at $913 per week or $47,476 annually (previously, the salary level was $455 per week or $23,600 annually).
• Employers will be allowed to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold.

What does this mean for businesses?  At a high level, the new rules require employers to evaluate employees in the range of $23,600 – $47,400 and determine the most cost effective compensation structure compliant with the new rules.

For some workers, employers may determine that it is more affordable to reclassify them as “non-exempt” (and therefore eligible for overtime wages) rather than raise the salary in order to meet “exempt” status.  As a consequence, the amount of overtime hours will have to be closely monitored (or eliminated altogether) to ensure payroll margins remain justified by that approach.

Some employers may prefer to designate one or more “exempt” employees (who already make above the statutory threshold) to serve as the “on call” point of contact for any customer needs or work obligations that arise after regular business hours.  This way, overtime wages can be avoided altogether without a forced salary adjustment.

Although a solution in only rare cases, some employers may be able to convert employees to an independent contractor relationship.  This would allow employers to circumvent the overtime obligations under the FLSA, altogether.  However, caution should be taken here to ensure that workers are properly classified, as employers face significant consequences for improper independent contractor designations.  More information about the proper classification of employees and independent contractors can be found HERE.

For more information about these rule changes and other strategies to mitigate the cost of compliance, it is best to speak with an attorney.