The Obama Administration recently made changes resulting in millions more American workers becoming eligible for overtime pay. The ruling, which applies to business of all sizes and goes into effect December 1, 2016, stipulates that any employee making less than $47,476 annually (or $913 weekly) is owed time-and-a-half pay when the employee works more than 40 hours per week. The change more than doubles the current $23,660 per year/$455 per week threshold.
“This is the most significant move in at least a decade by the federal government to protect worker pay,” says Tom Spiggle, founder of The Spiggle Law Firm, which focuses on workplace law. “The new rule increases by almost five-fold the number of workers who will be considered ‘non-exempt’ under The Fair Labor Standard Act (FLSA) and thus eligible for overtime.”
Sweeping Changes in Overtime Pay
Since its formation in 1938, the FSLA has protected workers’ pay—especially lower-income earners. The Obama Administration decided that the requirements threshold for overtime pay needed updating, as inflation has chipped away at pay over the years since the last change to the law in 2004.
The new ruling has a set of teeth: Employers who violate the law can be required to pay affected workers two times what would have otherwise been owed them. Employers may also be required to pay employee's attorney fees.
“The change in the law in one respect is minor, but given all that needs to be updated and clarified in the FLSA, it is hugely significant,” says David Lewis, president and CEO of OperationsInc, which provides human resources outsourcing and consulting services. “All too often employers see who gets overtime pay as a discretionary item versus a legal one. The change will force employers to face the FLSA and in many cases comply with the law for the first time. As a result, more employees in the U.S. will be compensated in line with legal requirements, and in many cases that means higher net pay.”
Though the change is sweeping,Spiggle explains how the update could be largely positive for small businesses.
“The new increased overtime rule will help level the playing field for overtime pay, making it more difficult for businesses that pay more to be undercut by the competition. Second, higher pay will give employees more funds to pay for services that help them stay at work, like childcare and health care. Third, as Henry Ford recognized a century ago, businesses cannot grow if workers cannot afford to purchase products. While the expansion of overtime requirements will certainly cost small businesses more in labor costs, it will also provide a big pool of consumers with means to purchase products and services.”
Safeguard Against Non-Compliance Issue
Given the potential for having to come up with back pay should your employees be paid incorrectly, it may be in your best interest to plan ahead to ensure that your company abides by the new ruling.
As Lewis sees it, there are three options. “Small businesses in particular will need to look at this as a strategic exercise,” he says. “You can simply start paying overtime to those affected, which will cost you more money. You can raise salaries of those affected to just above the $47,476, also costing more money. Finally, you can restructure workloads so that work is being done for the least amount of money possible. Overall this means more in the way of payroll expense in most cases for the same productivity.”
[pullquote showtweet="false" username="Tom Spiggle" alignment="center"]Failure to properly classify an employee can lead to a costly lawsuit under the FLSA, involving not only paying back wages and attorney fees, but also penalties.
Tom Spiggle, founder, Spiggle Law Firm[/pullquote]
Patty Dominguez, chief strategist for the small-business consulting firm CREATE Buzz, adds: “The first step for business owners is to closely identify current staff roles, responsibilities and their hours of work on a weekly basis. It may be appropriate to reorganize staff and establish new time tracking procedures.”
In order to comply with the ruling, it’s necessary to review current employee classifications to ensure that all employees are correctly classified as exempt or non-exempt, notes Spiggle. “Failure to properly classify an employee can lead to a costly lawsuit under the FLSA, involving not only paying back wages and attorney fees, but also penalties.”
In order to classify employees correctly, Spiggle suggests consulting with an attorney well-versed in this area. “In this case, an ounce of prevention is worth avoiding the pound—or 10—of cure,” he says. “This doesn't mean that a small business needs to open its pocketbook to a big, expensive firm. Many management-side lawyers are sensitive to the needs of small businesses and offer flat fees that are reasonable and predictable.”
Spiggle also suggests reviewing your arrangements with contract workers. “Given the rise of the use of independent contractors, the IRS, Department of Labor and lawyers that represent employers are on heightened alert for misclassification in this area,” he says. “With the new FLSA law, an employer could be subject to a double whammy of fines for incorrectly classifying a worker as an independent contractor, as well as the need to pay those reclassified as employees retroactively for overtime.”
Dominguez suggests using technology to ensure that your company complies. “By launching software solutions for time and attendance tracking, owners keep a watchful eye on their current staff roles,” she says. “This takes the guesswork out of monitoring actual work hours and provides archiving of employee time. The aggregate raw data also allows small-business owners to make necessary changes in staff roles and responsibilities as well as identify the need to increase headcount versus paying overtime. Archiving this data also mitigates exposure should an employee take legal action claiming missed overtime pay.”
Communicate with Employees Regarding Overtime Pay
“Assume that your employees are aware of the law change and have already started talking about the impact with coworkers and friends,” Lewis advises. “Deal with the situation head-on versus trying to ignore it and assuming your employees will do the same. Once your plan is set, meet with affected employees and explain to them how things will work come December 1, 2016, or sooner if you are so inclined.”
Dominguez agrees. “By launching a carefully crafted communication plan, employees are held accountable to follow the new rules of employee hours monitoring.”
Be Aware of More Extensive Overtime Pay Issues
Because many small businesses have failed to comply with the FLSA requirements, this has “created a far bigger issue with a far larger impact than addressing how to comply with the current law change,” says Lewis.
“Many businesses have no non-exempt employees and yet many of those employees have been working overtime for years and haven’t gotten paid for the time according to the FLSA Wage and Hour guidelines. Even if small-business owners adjust practices to comply with the new law, those employees who have worked overtime without proper compensation are due two years of retroactive back pay. Audited companies will discover that even though they’ve addressed the current law change, they owe employees a substantial amount of back pay.”
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