In May, President Obama announced major changes to the United States’ overtime pay rules, with the overtime pay exemption more than doubling from $23,360 a year/$455 a week to $47,476 a year/$913 a week. While most people see this as a good thing – when adjusted for inflation, the new amounts are roughly equivalent to where they were in 1975, making the increase long overdue – many small business owners are understandably concerned about how this will affect them financially.

As the overtime mandate affects only salaried workers – those who, for the most part, get paid the same regardless of how many hours they work – some business owners may have the knee-jerk reaction to switch some of their salaried people over to hourly employees in an effort to lessen the financial impact. Others may look into bumping up the salaries of employees who are close to the threshold to put them above the $47,476 annual cutoff, and thereby make them ineligible for overtime pay. So how will the mandate affect your business, and what options do you have? It depends on what type of employees you have – salaried or hourly – and what type of work they do. Your hourly employees will not be affected by the new rules, but your salaried employees may be.

The new overtime rules are all about making sure employees are paid for the time they work. Employees who are paid hourly already get paid time and a half for any hours they work over 40 hours a week. Salaried employees often don’t get paid overtime, but they frequently have a lot of flexibility in how and where they work, as long as the work gets done. Some employers even offer special perks for salaried employees in lieu of overtime pay, such as the ability to work remotely, flexibility in schedule, comp days or extra time off when a lot of overtime is worked, etc. Much of that may not be possible under the new overtime rules.

However, the new rules do not affect all salaried employees. It all depends on the job function. If the employee’s primary work function is administrative, executive, managerial or professional, then he or she is exempt from these new rules. Everyone else, however, is not. Most of the currently salaried employees who will be affected work in the service industry, like the retail and restaurant industries. For example, in an article in USA Today, the primary work function of Ryan Davis, a salaried assistant manager at Grotto Pizza in Rehoboth Beach, Del., does not fall under one of the exemptions. As a salaried employee, his paycheck is the same regardless of whether he works his usual 50 hours a week or puts in 70 hours during the busy summer season. Under the new overtime rules, he would be eligible for overtime pay, which could put another $500 in each paycheck.

Businesses of all sizes have options to bring overtime-eligible employees into compliance:

  • Raise employees’ pay above the $47,476 a year/$913 a week threshold. This would work best when employees’ salaries are already close to the threshold and they would likely get a raise to bring them to that level anyway.
  • Limit employees to 40 hours a week and hire temporary staff or freelancers to work the extra hours. Unfortunately this will require careful tracking of how many hours are worked and will limit the freedom employees have to get work done.
  • Pay the overtime, but cut base salaries or other benefits to compensate. This could backfire by having the feel of a demotion or pay cut, even though the pay amount will be the same in the end.
  • Some small business owners may decide to reclassify overtime-eligible salaried employees to hourly employees. However, one of the perks salaried employees enjoy is not needing to keep track of their hours, whereas hourly employees must track hours. Also, any overtime often has to be approved by a manager. This, too, could feel like a demotion and may result in a difficult transition for salaried employees who are switched to hourly pay.

The new overtime rules do not take effect until December 1, so there is plenty of time to explore your options and make the right decisions for your employees and your business. If there is any question regarding what you should do, it would be wise to consult an employment law attorney to help guide you through the process and further explain your options.

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