7 Ways to Respond to the New DOL Overtime RuleExperts reveal how to comply with the regulation at minimal cost while keeping employees from leaving.
Making payroll can be tough enough some months, and soon, cutting those checks could hurt even more. Under the new U.S. Department of Labor overtime rule, effective Dec. 1, most white-collar, salaried employees who earn $47,476 or less will be eligible for time-and-a-half pay if they work more than 40 hours a week, a considerable jump from the current salary threshold of $23,660.
The rule is designed to ensure employees are paid fairly. “The people who will benefit from this rule have been working extra hours without seeing a dime of overtime pay,” wrote the DOL.
But business experts have noted it will likely pose a big challenge for smaller businesses that don’t have the financial resources of larger corporations.
“This is a tough issue for small businesses,” said Walter Olson, senior fellow at the Cato Institute, a think tank in Washington, D.C. “The rule will deeply cut into small payrolls and force hard decisions.”
“For most small businesses, it won’t just be an issue of stop paying overtime,” Olson said. “Instead, it will be a combination of tracking people’s hours to make sure they don’t work overtime, or lowering their base pay and allowing the overtime and making sure their pay stays the same.”
Experts weigh in on how to comply with the rules at minimal extra cost while keeping employees happy.
1. Convert salary to hourly
One option is to convert salaried employees to hourly pay.
“If you pay someone by the hour, it’s much easier to track the number of hours they are working, and not end up paying them for hours they haven’t worked,” explained Dan Bosch, manager of regulatory policy at the National Federation of Independent Business.
Bosch offered a simple formula to keep this solution cost neutral.
“For an employee on salary who generally works overtime, you multiply the number of overtime hours by 1.5, add that number to 40 hours, and divide the current weekly salary by the total. That will give you their new hourly rate, and you’ll be paying them the same amount in the end, but including overtime,” he said.
“If small businesses can’t afford to pay more overtime, they will choose this cost-neutral option,” he said.
The downside: Workers may perceive the move from salary to hourly as a demotion, said Bosch.
“Achieving a salaried position is akin to feeling like you’ve arrived in your career. Now, being paid hourly, employees might feel that their organization isn’t as committed to them as they thought they were,” he said.
“If you mess with the equation — or workers’ wages — too much, you’ll have problems staying competitive in the labor market,” warned Brian Lego, research assistant professor at West Virginia University’s Bureau of Business and Economic Research.
2. Bring in new hires at a lower hourly rate
Lego suggested bringing in new hires at lower hourly rates as a way to balance the equation between hours, work and overtime hours paid.
“With the lower starting rate, if employees happen to accrue overtime, it will add up to the old salary offered,” he said.
3. Limit salaried employees to 40 hours
Another tactic is to keep employees on salary but allow them to work only 40 hours a week. If more work is needed, hire part-time workers to make up the difference, Bosch proposed.
4. Raise salaries that are near the threshold
If a salaried employee is already near the $47,476 threshold and tends to work overtime, bumping up his or her salary to the threshold makes sense, Bosch said.
5. Divvy up hours
Businesses should figure out how to divvy up work hours to try to prevent overtime, said Leo. If one employee is about to go into overtime, see if you can rejigger the workload.
6. Know who’s exempt
Companies must take care to know how employees are classified and categorized. Because workers whose duties are considered managerial are exempt from getting overtime, it’s critical to know who is legally exempt and who isn’t, noted Leo.
“[Companies] can’t just fiddle with people’s job titles and say they don’t have to pay overtime because they are exempt,” Lego said. “Employers can create job titles out of thin air and not pay overtime because of how employees are classified. But this could get the businesses in trouble. The Department of Labor will set up parameters, and companies will have to abide by them. Businesses will have to figure out who really is classified as exempt, according to their job duties.”
Olson advised, “My advice for small businesses, to avoid lawsuits, is you will want to study up on the law; if you’re friendly with a lawyer, ask them how it works. Don’t trust your intuition.”
7. Find a good way to track hours
Time clocks are old-school, especially at a time when many employees work from home or remotely at other locations, said Olson. “There will be a lot of interest in trying to find apps that keep track of hours that are less onerous.”