Changes to overtime pay are coming: Here’s how to prepare

By Tina Irgang

A new rule taking effect Dec. 1 will dramatically expand the number of workers eligible for overtime pay. How will the change affect your business, and how can you get ready for it?

The rule roughly doubles the salaried cap for overtime-eligible employees. Now, “nearly all salaried employees earning less than $47,476 a year will be eligible for time-and-a-half overtime pay,” notes The Chicago Tribune. Previously, the cap was $23,660.

The White House has said that the rule will make an additional 4.2 million workers eligible for overtime, and that it is intended to help combat wage stagnation.

However, some argue that the rule will simply drive employers to reclassify salaried workers as hourly. CKE Restaurants CEO Andy Puzder makes that argument in an opinion piece for Forbes. “Turning highly sought-after entry-level management careers into hourly jobs where employees punch a clock and are compensated for time spent rather than time well spent is hardly an improvement on the path from the working class to the middle class,” he writes.

Other employers already say they will hold off on new hiring and limit work time for existing employees, according to The Wall Street Journal.

The end of flexible hours?

Another concern: Adjusting to the millennial sensibility and the reality that more and more parents are also full-time workers, many businesses have adopted flexible hours, allowing their employees to come and go as they need to, as long as the work gets done. Some now worry they might be forced to change back to the old model of rigidly tracking hours, according to The New York Times. “If somebody needs to pick up a sick kid or go to a doctor’s appointment, we let them do it because we know that at some point they’ll make up for it. Once you start tracking hours, that all changes,” says one CEO quoted in the article.

The Times also notes that employers have various options for complying with the new rule:

  • Raise the pay above the threshold so employees are once again ineligible for overtime.
  • For employees who regularly work overtime, cut base salaries in the hope that overtime pay will make up the difference.

In addition, many business owners are likely to consider hiring freelancers and contractors to pick up extra work, so as to avoid overtime altogether. However, keep in mind that relying on contractors comes with its own share of risk. In recent years, the federal government has made it a focus to investigate complaints of employees being misclassified as contractors. (Here is a rundown of some of the criteria the government uses to determine contractor vs. employee status.)

Get ready for the rule

Whatever you think of the new overtime rule, the time to prepare is now. Here are a few ways to get ready:

  • Make a list of employees whose salary is below the new cap, suggests Forbes. Note those employees’ average hours worked to make a financial projection.
  • Consider the viability of increasing salaries. For each newly eligible employee, compare the likely cost of paying overtime — based on their previous work habits — to the cost of raising their salary above the cap, suggests Fox Business.
  • Get serious about tracking hours. Using employee time and attendance software may add to your upfront costs, but could ultimately help you avoid unplanned overtime, notes Forbes.
  • Beware the lunch trap. “Many systems look at an employee’s schedule and note that they’re supposed to take an hour for lunch each day, so that’s automatically deducted from the employee’s compensation. However, if that employee works through lunch and doesn’t communicate that to a manager, there’s a potential risk for a future claim,” notes Forbes. Make sure employees log in and out for each break, and that managers review attendance reports weekly to assess the risk of overtime.

 Tina Irgang is the production editor for SmartCEO. Contact her at tina@smartceo.com.