As most employers are aware of by now, the Department of Labor (“DOL”) issued new rules governing overtime pay. While these regulations are expected to cost employers an additional $295 million per year over the next ten years, there are ways you may address this issue so that your share of that burden is limited. In the following article, we will first provide some background on the prior overtime requirements. Next, we will provide a brief summary of the changes made and the expected effects on employers. Lastly, we will provide five different ways for you to address this issue in your business.
Background on the Overtime Requirements
Employers generally have been required by the Fair Labor Standards Act (“FLSA”) to pay employees the federal minimum wage for hours worked up to 40 hours a week and time-and-a-half for all hours worked over 40 hours a week2.
Certain employees, however, have been exempted from the time-and-a-half overtime pay requirement. If an employee is employed either “in a bona fide executive, administrative, or professional capacity” or as an “outside sales employee”, then the employer is not required to pay time-and-a-half. 3 This “white collar” exemption has been difficult to apply for most businesses, as the applicable terms are all undefined.
In order to ease the burden on businesses, the regulations attempted to clarify the rule by applying three tests to determine if an employee is entitled to overtime pay.
1. Salary Test: First, to meet the exception the employee must be employed on a salary basis, meaning the employee receives a predetermined amount of compensation per pay period. In other words, the employee is entitled to the compensation even if the employee works no hours, subject to some exceptions.
2. Salary Basis Test: Second, the salaried employee must then make more than a minimum salary per week. Before the Obama administration’s recent changes, this amounted to $455 per week or $23,660 per year4. Thus, any salaried employee who made over $23,660 a year was not entitled to time-and-a-half for overtime, provided the employee also met the final test.
3. Duties Test: Finally, for the employee to be exempted, the salaried employee must also be required to perform certain duties. These duties vary per exemption. For example, to meet the “learned professional” exemption, the employee’s:
- “. . . primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
- . . . advanced knowledge must be in a field of science or learning; and
- . . . advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.”5
Recent Changes Made by the Department of Labor and the Expected Effects on Employers
On May 18, 2016, the Obama administration finalized rules to expand the reach of the overtime rules to an additional 4.2 million workers. This was accomplished by changing the following:
- Raising the minimum salary basis from $455 per week ($23,660 a year) to $913 per week ($47,476 a year). Per the administration, this means that an additional 35% of full time workers will be automatically entitled to time-and-a-half overtime pay from their current employers.
- Unlike in the past, the minimum salary threshold will now be raised every three years. This is not tied to inflation, but, rather, is tied to 40% of “weekly earnings for full-time salaried workers in the lowest wage Census Region”. By basic statistical theory, if everyone raises the salaries of employees to meet the new minimum standard, then the new minimum will be raised substantially. Despite this, the DOL estimates the new minimum salary to be only $51,168 ($984 weekly) in 2020.
- Bonuses, incentive payments, and commissions may count towards 10% of the salary threshold ($4,750 for 2016). This is an improvement on the past, where no incentive payments were considered.
While the idea of raising employees wages sounds good in theory, someone has to pay the bill. Unfortunately, for these overtime rules, employers bear the brunt of the burden. The DOL estimates employers will incur additional costs of approximately $2.95 billion over the next ten years6. In order to minimize your share of this cost, it is imperative to plan to address these issues now, before the rules go into effect on December 1, 2016.
5 Ways to Keep Your Labor Costs Low
The following five suggestions are ways you may attempt to address this issue:
1. Limit Hours: The most obvious adjustment may be to limit the hours worked by your employees to 40 hours a week. Simply, if you do not allow your employees to work over 40 hours a week, then your employees will not be due overtime pay. Due to the demands of your business, this may be impossible.
2. Spread Work Evenly: If you can not limit the hours worked, then you may be able to adjust the workload carried by some of your employees. If some of your salaried employees work under 40 hours, while others work overtime, then it will be cheaper to spread the work evenly. For every hour of regular pay, there is an hour of time-and-a-half overtime that you do not pay.
3. Hire Additional Workers: For employers where limiting hours is simply not possible, it may be beneficial to hire additional workers. Simply put, it may be cheaper to hire and train another salaried employee, rather than pay overtime to your current workforce. For example, Business A currently has 4 salaried employees which, under the prior overtime regulations, were able to handle the entire workload by working 50 hours a week. These employees received a salary of $30,000 a year. If Business A does not raise their salary and maintains the same workload, then Business A will pay an additional $11,250 per employee per year. If, however, Business A hires a 5th employee for $30,000 annual salary and all employees are limited to 40 hours per week, then Business A will save approximately $15,000 per year.7
4. Raise Salaries of Certain Employees: In order to exempt the employee from the overtime pay requirement, an employee must be over the $47,476 threshold. Although it seems counterintuitive, cost savings may be achieved by raising the employee’s salary, provided the employee already meets the above-mentioned duties test. For example, if Business A has a salaried employee making $47,000 annually working approximately 45 hours a week, then the new annual cost of that employee is as computed below:
Please see Table A of this newsletter for a decision guide based on the employee’s current salary and average hours worked per week.
5. Change Employee’s Salary to Hourly Rate Equivalent: One option is to change your current salaried employees, who are below the new minimum, to an hourly rate equivalent. Provided the employee works the same average hours of overtime, this should result in the employee receiving approximately the same salary, for the same hours. For example if an employee currently makes as salary of $35,000 annually, but typically works 50 hours in a week then the employee’s hourly rate equivalent, considering overtime, is $12.24 an hour. This results in approximately the same annual pay, as computed below:
Annual Normal Hours: 2,080
x Hourly Rate: 12.24
Annual Base Pay: 25,459
Annual Overtime: 520
x Hourly Rate: 12.24
x Time-and-a Half: 1.5
Annual Overtime: 9,547
While this may be a tough conversation with a current employee based on their perception of salaried pay, this would be an easy policy for new hires to maintain current labor costs. Please see Table B for a chart of the new hourly rate equivalents based on annual salary.
In today’s rising labor cost environment, it is vital for your company to address the financial burdens of your labor force on a regular basis. The above suggestions should help address the issue in a sound fashion, but you should always consider other factors that may affect your workers and your business. If sound decisions are made, however, your company may achieve a competitive advantage that will drive your bottom line.
1 The information provided in this newsletter is for informational purposes only and should not be construed as legal or financial advice on any matter. We have made every attempt to verify the information contained therein is from reliable sources, but no guarantee or warranty is being made that it is without errors or omissions. Should you need legal advice regarding your employees, we suggest that you seek out a licensed attorney in your jurisdiction. In no event will FRSCPA, PLLC, or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this newsletter or for any consequential, special or similar damages, even if advised of the possibility of such damages. Should you need financial advice regarding your business, please contact us and we will be happy to address your financial concerns, subject to our engagement letter’s terms and conditions.
2 “Overtime for White Collar Workers: Overview and Summary of Final Rule”, US Department of Labor,
3 Fact Sheet 17A, Revised July 2008, US Department of Labor,
4 Fact Sheet 17G, Revised July 2008, US Department of Labor,
5 For a full list of exemptions and a more in depth explanation, please see the Fact Sheet 17A. (Listed above)
6 Final Rule: Overtime: Questions and Answers, Reviewed May 24, 2016, US Department of Labor,
7 Business A Cost with 4 Employees= ($30,000 salary x 4 employees) + ($11,250 overtime per employee x 4 employees) = $165,000. Business A Cost with 5 Employees = ($30,000 salary x 5 employees) + ($0 overtime per employee x 4 employees) = $150,000.