Overtime is a major expense—and burden—for companies of all sizes, but it tends to be an even bigger issue for small and medium-sized businesses with more limited financial resources. If you run a business, you should know that a new overtime law was just passed that could impact your employees as well as your bottom line.
What the new overtime law entails
Those who are paid hourly or whose earnings fall below a certain threshold must be paid 1 and ½ times their typical hourly rate when they work more than 40 hours in the same week. But many employees are currently excluded from overtime because they earn too much. Beginning in December of 2016, an estimated 4.2 million more Americans will be able to take advantage of overtime pay.
Specifically, the new laws increase the minimum salary threshold at which salaried employees are exempt from overtime pay. The old rule used to be that anyone making more than $23,660 a year, or $455 a week, was not eligible for overtime. The new rules increase those limits to $47,476 a year, or $913 a week. Furthermore, this threshold will be adjusted every three years going forward to ensure that workers are being appropriately compensated when they clock in extra time.
So what does this mean for your business? In a nutshell, you might need to start paying certain employees overtime who previously weren’t eligible. And that change could be costly.
Some strategies to employ to comply with the new overtime law
As a business owner or manager, you do have some options for addressing these new overtime laws, but each comes with its own benefits and drawbacks.
First, if you have a number of salaried employees who earn less than $47,476 a year, you can bump up their salaries so that they become exempt from overtime. This could work out in your favor if you expect that these employees would likely accrue a fair amount of overtime pay. But don’t just guess at it—review your records to see how many hours these employees tend to work, and run some numbers to determine your break-even point between paying overtime and increasing salaries. It could be that the former might make sense—to shell out more overtime pay but keep salaries where they are.
There’s the psychological impact on your employees to consider as well. Your employees might celebrate a salary boost—until they realize that doing so exempts them from overtime. On the other hand, if they’re not used to getting overtime anyway, they may just come away grateful for their raises and up their game as a show of appreciation.
Another option is to keep wages the same and hire more staff. This way, the same amount of work is spread out over more people, which will reduce your need to pay overtime. Now there’s a downside to this too. Hiring more staff means spending time and money on training, and you might see a downturn in overall productivity as your new hires get up to speed. There’s also the risk of higher-than-usual turnover if you increase your staff but keep wages to a minimum. If your employees feel they’re being underpaid, they might be more quick to jump ship the minute a better offer comes along. That, and you may not attract the most motivated employees to begin with.
Of course, if you go that route, be sure you’ve got the best employee scheduling to avoid any headaches with your new staff.
No matter what strategy you employ come December, the key is to have a plan for when the new overtime rules take effect. Paying overtime to even a handful of employees could wreak havoc on your budget, so the more prepared you are, the easier the transition is likely to be on your business.