New overtime law: How it works and what changes for employers

First, the nuts and bolts: the FLSA overtime rule (Fair Labor Standards Act) clarifies which workers are eligible to receive payment for overtime work. Exempt employees aren’t eligible for overtime pay, while non-exempt employees are. Non-exempt employees must be paid time and a half for any hours they work that exceed the standard 40-hour work week.

Please keep in mind: Workable is not a law firm. This article is meant to provide general guidelines and should be used as a reference. It’s not a legal document and doesn’t provide legal advice. Neither the author nor Workable will assume any legal liability that may arise from the use of this article. Always consult your attorney on matters of legal compliance.

Who is exempt from overtime pay?

The FLSA overtime exemptions include executive, administrative, professional, computer and outside sales employees. Highly compensated employees are also exempt if they “customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee.”

There are certain criteria – such as the duties test and the salary threshold – that determine whether an employee falls under each of these exempt categories. For example, in order to determine whether an executive employee is overtime-exempt, they need to satisfy the salary threshold, i.e. they need to be salaried and paid above a certain amount per week.

Blue collar workers are never exempt from the FLSA no matter how much they make.

How does the overtime rule work?

The salary threshold is the most significant change: the minimum threshold was previously $455 per week, but the new overtime law raises this to $684 (or $35,568 per year for a full-year worker).

The raise in the salary threshold means that employees who are paid between $455 and $684 per week – and thus were previously exempt – will now be eligible for overtime pay. According to the U.S. Department of Labor (DOL), the number of employees nationwide who’ll benefit is around 1.3 million.

Another change is the salary threshold for highly compensated employees, which rises from $100,000 to at least $107,432 annually.

Also, the federal overtime law allows employers to count a portion of non-discretionary bonuses and commissions toward meeting the salary level (up to 10%) to reach the exempt status for employees.

The duties test doesn’t change with the new law.

What’s the controversy about?

In a nutshell, the new overtime law is less generous than the now-invalidated Obama-era law, which tried to bring employee compensation levels up to speed with inflation.

The overtime law signed during the previous administration aimed to double the existing salary threshold of $455 to $913 (or $47,476 per year). This meant that a much greater number of employees would have seen their paychecks increase, had this law not been eventually struck down by the United States District Court.

Also, the new law doesn’t provide for future automatic revisions once every four years, as in the original proposal. This means that any adjustments to the overtime law to the cost of living aren’t guaranteed, even despite the DOL’s commitment to start revising these guidelines (29 CFR Part 451) more often.

What does the new overtime law mean for employers?

Well, you’re likely to start paying overtime to some of your employees. Generally, if you employ previously exempt workers who are getting paid under $684 per week and work overtime, you might need to start preparing bigger paychecks.

Of course, there are things that some employers might do to avoid paying overtime, such as strictly limit their employees’ work week to 40 hours or raise salaries above the threshold. While some of these measures might have a positive impact on employees, too, (for example, by helping them achieve better work-life balance), make sure your solutions are viable and justified, instead of an attempt to game the system.

For example, calculate the costs involved in raising salaries and compare them with the costs of paying overtime to newly non-exempt employees, and how each scenario could affect employees. Morale may also be impacted if a more regimented timing system is introduced (i.e. requiring employees to submit regular work hour reports and/or finish their job within the allotted time even during high-intensity periods).

Paying overtime might also be good for business

Granted, added labor costs are a challenge for employers. But, paying employees for the work they’re doing is hardly a bad strategy; if workers receive more money for their effort, productivity and morale can increase.

And, if you’re in retail, hospitality or similar industries, you might even see a rise in revenue – after all, your workers are customers, too, and they might use some of the extra money to buy your services or products.

What should you do as an employer?

Here are some actions you can take to make the transition to the DOL overtime rule easier for you and clearer for your employees:

1. Consult an attorney

You can find helpful information online and on the DOL website, but a qualified lawyer can explain the details and provide useful advice. Remember that individual state overtime laws may have different thresholds, so look into those as well.

2. Revise employee classification

Many employers may unwittingly misclassify their employees as exempt or non-exempt (sometimes even as contractors instead of employees). Make sure your employees are correctly classified based on the exemption criteria by reviewing job descriptions (remember that job titles aren’t sufficient to determine exempt status.)

3. Communicate clearly

It’s good to have both an overtime and attendance policy to communicate guidelines to your employees. For example, you could inform employees about your approach to overtime (frequent/occasional, voluntary/mandatory, etc.) and explain how you’ll compensate voluntary overtime. Schedule trainings or meetings, too, to help workers adjust to timekeeping responsibilities.

If you already have these policies, ensure they’re updated with the new overtime law.

All in all, any legislative changes that bring about additional labor costs can be disruptive. But, the sooner you adapt, the better it’ll be for both your business and your employees.

If you do business in California, you should also pay attention to CCPA, the new privacy law. See our CCPA FAQ.