A New Rule’s Impact on Small Business Owners

The Proposed Overtime Rule of 2019 could have a dramatic effect on employers whose employees may no longer be exempt.

by Logan Block, Quinn, Johnston, Henderson, Pretorius & Cerulo
Logan Block

Small business owners face different challenges than large corporations. All employees of certain enterprises having workers engaged in interstate commerce are covered by the Fair Labor Standards Act (FLSA), which applies to full- and part-time employees in the private and governmental sectors. The FLSA established the minimum wage and more importantly, the “time-and-a-half” rule for wages that exceed 40 hours a week. The Proposed Overtime Rule of 2019 could have a dramatic effect on employers whose employees may no longer be exempt. However, there are several steps employers can take to ensure compliance while not breaking their bank.

FLSA: Exempt vs. Non-Exempt
At the core of the FLSA are the exceptions for exempt versus non-exempt employees. The difference between the two can save the employer thousands of dollars in overtime wages. 

Exempt employees are not subject to minimum wage and overtime requirements. To qualify, individuals must meet the requirements of the primary duties test and make at least $23,660 per year.

Non-exempt employees are not exempt based on duties or a salary test. Instead, they must be paid minimum wage. Most importantly, they must be paid 1.5 times their regular wage rate for all hours worked in excess of 40 hours in a single workweek. 

The primary duties test is one of the requirements that must be satisfied for an employee to be considered exempt. This is determined by several factors, including the amount of time spent performing exempt work, the relative importance of the exempt duties in relation to non-exempt duties, and the relative freedom employees have to perform their duties without direct supervision. Finally, their salary must be compared to the wages paid to other employees for the performance of non-exempt work. The FLSA establishes five categories of primary duties that qualify an employee as exempt: executive, administrative, professional, computer employees and highly compensated employees.

The New Proposed Rule
The Trump-led Department of Labor’s proposed new overtime rule had some similarities to the Obama-led DOL rule. The Proposed Overtime Rule of 2019 increases the minimum salary to $679 per week, or $35,308 annually. For highly compensated employees, their annual compensation increases to $147,414. This proposal allows for the use of non-discretionary bonuses to satisfy up to 10 percent of an employee’s salary—exactly the same as the Obama-led proposed rule. However, and most importantly, there are no automatic updates for minimum salaries. Instead, there is a commitment to review the requirements periodically, which requires notice and comment rulemaking. 

The Proposed Overtime Rule of 2019 is estimated to make 1.1 million exempt employees eligible for overtime. However, employers can increase an employee’s salary to keep them classified as exempt; thus, the employer is not liable for the 1.5x overtime payment. The proposed OT rule has a similar impact on about 201,100 highly compensated employees unless their employers increase their current minimum annual compensation.

Preparing for the New Rule
Small business owners need to understand and prepare for the new overtime rule that could become effective in 2020. The biggest threat is the implication of the 1.5 overtime payment that must be given to non-exempt employees who work more than 40 hours per week. Controlling their overtime hours could translate to thousands of dollars in savings. Thus, employers should devise and implement a system to control overtime hours worked by employees—especially those who could move from exempt to non-exempt if the proposed rule goes into effect. Below are a few suggestions for how small business owners can prepare for the new proposed overtime rule:

  • First and most importantly, analyze the hours of current workers—especially between exempt and non-exempt workers. Examine the job duties of each position to ensure exempt employees meet the “primary duty” tests. This analysis will determine what it will cost to comply with the proposed overtime rule, allowing employers to decide whether to increase the minimum salaries of exempt and/or non-exempt employees, or simply pay the 1.5 overtime requirement. 
  • Another step employers could take is to simply raise employee salaries. If an employee’s salary is already near the new minimum salary threshold, or if anticipated overtime costs will regularly exceed this threshold, raising their minimum salary could be easier and cheaper.
  • Reclassifying employees as non-exempt is another option. For salaried employees who are scheduled to work less than 40 hours per week, or whose duties do not require overtime, this option could be cheaper. The employer would not pay the 1.5 overtime payment if employees do not work more than 40 hours because they do not meet the threshold for the overtime payment. The same logic applies to employees whose duties do not require overtime.
  • Employers could also reclassify employees and adjust two different components of their work schedule to ensure compliance. The first option is to reclassify an employee and adjust their hourly rate. For newly non-exempt employees, the employer would determine and/or adjust an hourly rate that will be comparable to the salary they were paid when they were exempt—thus, this small change will not significantly affect the employee. Another option is to reclassify the employee and limit their hours. Employers may establish policies restricting overtime hours; they could consider dividing work among full- and/or part-time employees to avoid the need for any overtime.
  • Finally, reducing benefits to offset overtime expenses is another option for employers. Employers could reduce 401(k) matches, vacation accrual, sick days, health insurance contributions, etc. to offset the anticipated costs of the overtime payment under the new rule.

While the new Proposed Overtime Rule is not final (and thus not binding), it is still imperative for employers to be aware of the changes coming. They should prepare for the number of employees that may change from exempt to non-exempt, and take time to understand the financial implications for their business. Understanding the duties and overtime hours of their employees could save the employer thousands. PM

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