What the new overtime rules will mean for businesses and employees

Major changes to the federal overtime rules went into effect on December 1, and this could mean big changes in the workplace.

Some 4.2 million employees who aren’t eligible for overtime now will become eligible under the new rules. This could prompt many businesses to reduce overtime hours, hire new workers, raise or lower salaries, convert salaried employees to hourly employees, and adjust bonuses and commissions. It could also mean changes for workers who telecommute or have flexible schedules.

In general, employees must be paid time-and-a-half if they work more than 40 hours in a week, unless the employee is “exempt.” Currently, employees are “exempt” if they earn at least $23,660 per year; are paid on a salary basis; and perform managerial, professional, or administrative tasks. Employees who do not have managerial, professional, or administrative jobs are exempt if they earn more than $100,000.Here’s what changed on December 1:

  • The minimum salary for exempt employees will more than double, to $47,476. That means anyone making less than $47,476 annually will be entitled to overtime, no matter what kind of job they have.
  • Employees who don’t have managerial, professional or administrative jobs will be eligible for overtime if they make up to $134,004 a year.
  • The new figures ($47,476 and $134,004) will be indexed to keep up with inflation. They will be adjusted every three years based on salaries in the 40th percentile in the census region with the lowest wages.
  • In determining whether an employee earns enough to be exempt, an employer can now count bonuses and commissions. However, these payments can be included only up to 10% of the threshold. Also, they must be paid at least quarterly, and they must be “nondiscretionary” – meaning they’re paid according to a formula or incentive plan set in advance. Unannounced bonuses or spontaneous rewards won’t count.

Almost all businesses will want to consult with an employment lawyer and consider whether it makes sense to adjust their compensation scheme and employment practices in light of the new rules.

Here are some changes that businesses will likely be considering – some of which will benefit employees overall, and some of which might not:

  • Workers who earn just under the $47,476 threshold might be given a raise to $47,476 in order to avoid overtime.
  • Salaried workers who earn between $23,660 and $47,476 and regularly work more than 40 hours a week might be converted to hourly workers, with their hourly rate determined by their current salary and the average number of hours they currently work. The result would be that these employees’ overall compensation would stay the same, even though they will now be receiving overtime pay.
  • Businesses that regularly ask employees to work more than 40 hours a week might find it advantageous to reduce these employees’ hours and instead hire part-time workers or temps.
  • Some companies might try to turn employees into independent contractors – although this is difficult and can get a business into a lot of trouble if it’s done incorrectly.
  • Companies will need to train many white-collar employees who have never tracked their hours before on how to do so. This could be tricky, since some managers might find the idea demeaning or consider it akin to a demotion. Businesses might need to communicate that the change is required by the new law and show how it’s a net benefit to employees.
  • The same is true for employees who work from home or have highly flexible schedules, and who might be resistant to the idea of tracking their hours.
  • Companies might need to adopt clearer policies about what constitutes “work.” For instance, businesses might want to prohibit employees from checking their work e-mail at home if doing so could trigger overtime.

Any changes a company makes will also need to take into account state overtime regulations, which are still in effect despite the federal change. And remember, companies that fail to follow the new rules can be subject to stiff fines as well as back pay and other penalties.