The Department of Labor announced changes to overtime regulations in May. While expected and widely accepted — exempt and nonexempt salary levels were last updated in 2004 — the amount of change was steeper than many employers anticipated.
“The DOL expects that 4.2 million workers will go from exempt to nonexempt, including 134,000 in Ohio,” says Colleen Bement, vice president of Business Development at PayBridge. “This is a large part of the working population, because you’re basically doubling the level.”
Smart Business spoke with Bement and Tony Chiviles, president of PayBridge, about DOL’s changes, how companies can prepare and what they need to track to be compliant.
What are the overtime regulation changes?
The salary level for whether an employee is exempt or nonexempt from overtime was raised from $23,660 ($455/week) to $47,476 ($913/week) per year. The increase was based on setting the standard at 40 percent of the wages of full-time salary workers in the southern region — currently the lowest wage census region in the U.S.
Salary thresholds will now be re-evaluated every three years, to increase predictability.
The total annual compensation for highly compensated employees has been set to the equivalent of the 90th percentile of full-time salaried workers, which is $134,004. It previously was $100,000 per year.
Also, for the first time, employers can use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the standard salary level. These have to be paid at least quarterly.
When does this go into effect?
Employers have until Dec. 1 to become compliant. The first automatic update to the salary thresholds would occur Jan. 1, 2020.
How can employers ensure compliance?
There are a couple ways employers can become compliant. The simplest is to raise all of your salaried employees’ wages above $47,476. This works best where salaries are already close to that threshold.
Another solution is to change employees who make between $23,660 and $47,476, from salary to hourly. However, receiving a particular salary, alone, doesn’t indicate that an employee is exempt from overtime and minimum wage protections; you may need to make other adjustments.
Finally, there’s a cost-neutral solution. You take the employees’ current weekly salary and divide that by the number of hours in a week actually worked. Then add in the 1.5 overtime hours, in order to get a new hourly rate. You change the employee to hourly, and lower his or her hourly rate to ensure the final pay remains the same.
How should business leaders prepare over the summer and fall?
Many companies will need time and attendance software, in order to monitor employee hours and ensure they take a 30-minute lunch. Start looking at time-keeping solutions. Depending on your business size and how many employees are affected, you may need to invest in this technology.
Identify which employees will be affected and how much it will cost to pay overtime. Then, you can determine which of the possible solutions will work the best.
Some employers may determine they want to contribute less to their benefit plans because of higher salaries. There could be internal issues, as well. For example, if an employee makes $40,000 and works overtime, he or she may make more than his or her $48,000-a-year supervisor. The supervisor may want a raise or your employees might not want promotions. Or, if an employee is working 60 hours a week and making overtime, you might decide to hire another person and split the hours.
You have to communicate with your employees. Try to lesson the concerns or questions upfront — before someone’s pay gets cut with little notice. (Plus, some states have notification rules for pay cuts.)
You also need to keep three years of payroll records and two years of time sheets, in the event of a future audit. A stack of paper time sheets written in pencil won’t cut it.
There are resources available to help you calculate the best solution. Once you determine what you want to do, have an expert or adviser double-check to ensure you’re compliant with the law. The penalties will be costly.
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