Federal Overtime Changes Ahead for Small Businesses

If your small business currently employs workers who are exempt from overtime pay, the recent presidential memorandum signed by President Barack Obama requesting changes to overtime regulations could mean your company’s payroll amounts may increase by 2015 or 2016.

In this memorandum, the U.S. Department of Labor (DOL) was directed to devise new federal overtime rules that would change employer’s wage and hour obligations under the Fair Labor Standards Act (FLSA) in determining which employees are considered exempt from overtime compensation. Basically, these new regulations, if put into place, will make more “white-collar” workers eligible for overtime pay (typically at one-and-a-half times the employee’s regular rate) for all hours worked over a 40-hour workweek.

While the memorandum doesn’t spell out exactly what the changes will be, per the President’s directive, the DOL will likely make changes to the minimum salary and primary duty requirements within the regulations.

• Minimum salary requirement – The DOL is expected to increase the minimum salary used in determining overtime exemptions. Currently, an employee must make at least $455 a week ($23,660 annually) to be considered exempt from receiving overtime pay. In 2004, the last time revisions were made to the FLSA overtime regulations, the minimum salary requirement was raised from $250 a week to the current $455. According to a White House fact sheet, $455 in 2004 would equal $561 in today’s dollars. And if the $250 minimum, set in 1974, was indexed to today’s standards, the minimum salary basis would be about $1,000 per week now.
• Primary duty requirement – This requirement dictates the main duties an employee must perform to be considered exempt from overtime pay. The DOL could replace this requirement with a “percentage of time” test which may require an employee to perform exempt duties over 50% of their weekly time spent working.

While these changes are intended to help the middle class per the President, many fear these changes may have negative consequences on economic growth. Employers may:

• Convert salaried exempt employees to hourly employees.
• Pay lower hourly rates to account for expected overtime or performance-based incentives, like commissions and non-discretionary bonuses, that must be included in overtime calculations.
• Reduce performance-based incentives.
• Prohibit exempt employees from working overtime or place strict limits on the amount of overtime allowed.
• Increase the number of part-time positions while decreasing full-time positions.

In the meantime, changes to federal overtime rules won’t happen overnight. Before the final regulations can be put into place:

1. The DOL will draft its changes.
2. A public comment period will take place.
3. The DOL will make revisions to their draft based on the public’s comments.

This rulemaking process could take 12 to 24 months before completion.

Once The Payroll Department learns of the DOL’s proposed rule changes, we’ll let you know in a future blog post. Meanwhile, if you have any questions about current FLSA overtime rules for exempt employees and how they affect your workplace payroll, contact us at (317) 852-2568.

-Teresa Ray, Owner, The Payroll Department