President Obama recently made news in the business world by announcing an executive change to the rules governing overtime pay. This change will result in a greater number of workers who will be eligible for overtime pay. Because this change has the potential to affect the size of workers’ paychecks, it is sure to capture the attention of employees and employers alike.
The crux of the rule change is pretty simple. Previously, salaried workers who made more than $455/week ($23,660 annual salary) were not eligible for overtime pay even if they worked more than 40 hours in a week. Now, salaried employees earning up to $913/week ($47,476 annual salary) must be paid overtime wages when they work more than 40 hours in a week. The upper limit at which workers are eligible for overtime has also been increased. Approximately 4.2 million salaried workers would be potentially affected by the overtime rule change.
The rule change also contains a provision to automatically increase the overtime threshold every three years. Starting in 2020, every third year it will be raised “to the 40th percentile of full-time salaried workers in the lowest-wage census region” (DOL Overview and Summary of Final Rule). In other words, the salary which 40% of workers in that region are at or below would serve as the cut-off for determining whether salaried workers are entitled for overtime. Before the new rule change, this threshold had not been changed since 2004.
As we all know, sometimes employees receive compensation through bonuses or commissions that are paid in addition to their regular salary. The change in regulation also addresses this situation. It allows up to 10% of the employee’s calculated salary to include non-discretionary bonuses, incentive pay, or commissions as long as these are paid on a quarterly basis or more frequently.
As with any change in regulation, small business owners must assess the impact of this new overtime rule and evaluate what changes must be made in their own business practices. Some business owners may choose to keep work-weeks of salaried employees to a maximum of 40 hours. Others may raise wages to keep workers above the threshold. Still others may choose to allocate workload differently to minimize overtime paid. The new rules take effect December 1, 2016 so you will want to think through your situation as soon as possible.
As you consider your options, this shift may introduce added complexity to your already complicated payroll operation. Give us a call at The Payroll Department (317-852-2568) to see how we can help you to keep things simple and structured as you adjust to whatever new rules may be issued. For more detailed information on the overtime rule, see the Department of Labor’s website.
-Jessica of The Payroll Department Blog Team