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Meeting the Challenge of the New Overtime Rule

By Larry Ryan, EVP, Commercial Banking

August 23, 2016

Businesses of every size across the country are gearing up to ensure they will be compliant with a new rule announced by the U.S. Department of Labor which dramatically increases the number of workers eligible for overtime pay.

What’s changing?

The new rule, which takes effect on December 1, 2016, roughly doubles what minimum salaried employees can earn before they are classified as exempt from receiving overtime pay for working more than 40 hours a week. Previously, the threshold was $455 per week or $23,660 annually, but after December 1, salaried employees who earn less than $913 per week or a new standard salary level of $47,476 a year, would be eligible to receive time-and-a-half overtime pay. The Labor Department estimates 4.2 million white-collar workers would be newly eligible for overtime benefits, including about 193,000 in Illinois.

The overtime rule allows nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test requirement.

What’s not changing?

To be considered exempt (or ineligible for overtime), workers’ jobs must pass both the salary threshold outlined above as well as a test of their duties or job responsibilities. The newly released regulations do not include any changes to the standard duties test, which defines responsibilities for exempt as executive, administrative and professional employees, as well as , teachers, doctors, lawyers and outside salespeople.

How should businesses meet the new requirements?

While the new overtime rule applies to all businesses, there is no one-size-fits-all strategy for compliance. With the deadline for implementation only a few months away, businesses need to develop a strategy that maintains productivity, while keeping an eye on their bottom line. The Department of Labor suggests that businesses explore the following options to find one that best fits their particular workplace:

  • Pay time-and-a-half for overtime work;
  • Raise workers’ salaries above the new threshold;
  • Limit workers’ hours to 40 hours a week;
  • Some combination of the above.

Implementation of the new rule also provides an opportunity for businesses to evaluate and align hours and staff workload. Businesses may consider options such as hiring additional staff or matching current employees’ hours to ensure that the right tasks are performed at the right time to handle the workload. The Department of Labor provides full instructions for how to meet the requirements of the new overtime rule.

What should small businesses do now to prepare to meet the December overtime implementation?

There is no requirement that employees “punch in” or “punch out” under the new law, but it will be important for small business owners to control unplanned overtime to ensure compliance. To help employers start the process, offered the following nine-point checklist:

  • Determine the final rule’s impact on your business by becoming familiar with the rule changes and how they affect your business.
  • Conduct an audit of employees to determine how many employees are likely to be affected.
  • Track exempt employees’ time, including the time exempt employees spend working from home after hours, since it, too, would be compensable.
  • Determine which employees will transition to non-exempt status.
  • Develop a plan, reviewing various scenarios and determining the impact on your overall financial picture.
  • Update timekeeping policies and ensure that the timekeeping method used is adequate to record time worked and overtime.
  • Develop training procedures.
  • Create a communication plan to share expectations with employees.
  • Start preparing now.

This December’s implementation of the new overtime rule is just the beginning of overtime evaluation. Under the new rule, the salary threshold for overtime pay will automatically be adjusted every three years. Based on current projections, the threshold is expected to rise to more than $51,000 with its first update on January 1, 2020.

By taking action now and exploring options that pay employees fairly, without negatively impacting your bottom line, your business will be well positioned to be compliant with the new overtime rule come December.

Disclaimer: The information contained within this report has been obtained from sources deemed to be reliable; however, we do not guarantee its accuracy. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other investigations as you deem necessary, including obtaining legal, financial and/or tax advice. Back to top