There has been much talk recently about the proposed federal rules in the U.S. regarding overtime pay. Many observers are confused about exactly who would be entitled to overtime and under what circumstances. In addition, many small business owners are worried about how these proposed rules will affect their business.
Even if you do not have exempt employees, it pays to understand the proposed rules because they will likely affect your business.
The Way It Is Now
Currently, whether an employee receives overtime pay (pay that is 1.5 times the standard rate of pay for the employee) is determined by multiple laws. On the federal level, the main law is the Fair Labor Standards Act. In addition to the FLSA, there are state laws that are applicable for employees who work in that state (typically these rules apply regardless of where the employer is located but are solely based on where the employee performs the work).
In addition to the FSLA and state laws, there are additional federal and state laws that apply to specific industries. For example, truck drivers and railroad workers have separate federal laws that govern their pay.
Under the FLSA and most state laws, employees are classified as either non-exempt or exempt. Non-exempt employees are eligible to receive overtime pay. Exempt employees are not paid overtime in most circumstances.
Non-exempt employees are eligible to receive overtime pay. Exempt employees are not paid overtime in most circumstances.
Three classifications of employees may be considered exempt: (a) administrative, (b) executive, and (c) professional. Anyone that does not fall into one of these three classifications is considered non-exempt — assuming that there isn’t another federal or state law that would apply to that job category — and must be paid overtime for all hours worked above 40 hours in a 7-day period.
State laws will also come into effect. For example, some states legislate that overtime applies not only to anything worked over 40 hours in a 7-day period, but may also apply to any hours worked over 12 in a 24-hour period, even if there are less than 40 hours in a 7-day period.
In many cases, employers try to categorize employees as exempt because it is to the employer’s benefit to do so. If any employee is exempt, an employer does not need to worry about ensuring an employee only works 40 hours in one week or determining exactly what the employee’s pay is to calculate overtime.
In some cases, it also benefits an employee. Many employers offer certain benefits to only exempt employees. These benefits can include vacation pay, sick time, or additional medical, dental, and insurance benefits that are not required by law. However, some see the exemption categories as a way for employers to take advantage of employees who are wrongly classified or lower wage exempt categories.
Exempt vs. Non-exempt
To determine if an employee falls into one of the non-exempt categories, an employer must look at (a) the amount of pay the employee receives, (b) how the employee is paid, and (c) the type of work the employee does. To be classified as exempt, currently an employee must be paid at least $23,600 per year regardless of the exemption category and be paid the same rate each pay period regardless of hours worked (with some stated exemptions).
To determine if an employee falls into one of the non-exempt categories, an employer must look at (a) the amount of pay the employee receives, (b) how the employee is paid, and (c) the type of work the employee does.
To fall under the executive exemption, an employee’s primary duty must be managing other individuals. This includes significant input on staffing, such as whom to fire, hire, and what to pay the employees that the managing employee oversees.
To fall under a professional exemption, the employee must be required to have a significant amount of schooling or the equivalent work experience or certification to complete the required assigned tasks. Typically, professionally-exempt employees are lawyers, doctors, engineers, computer scientists, and other highly paid, highly-educated professions.
The administrative category typically has the most gray area. To fall under the administrative exemption, one must primarily perform office work and have a large amount of discretion in how to perform the work. In addition, the position must have a significant confidential and discretionary aspect.
For example, an executive assistant to a lawyer who must keep information confidential and must determine his work schedule based on the priority of work may be considered an administrative exemption whereas someone that primarily staffs a receptionist desk only answering phones and greeting guests may not be considered exempt even if the titles are the same.
The Federal Proposal
If an employee falls under the administrative, executive, or professional category, that employee currently only needs to make a salary of $23,600 per year to qualify as exempt. Under the new federal rules — here’s a PDF of the proposal and request for comments — an exempt employee would be required to meet the same classification requirements but also make $50,440 per year.
Currently, an employee working full-time (2,080 hours per year) may be paid $11.35 an hour to be considered exempt if the employee only works 40 hours a week. Under the proposed rules, an employee must make $24.25 an hour if she works only 40 hours a week.
The federal minimum wage is currently $7.25 per hour. An employee earning the minimum wage would have to work 2,863 hours in one year to make the lowest amount required under the current rules (approximately 55 hours a week) once overtime is calculated. Under the new rules, someone working minimum wage would have to work 102 hours a week once overtime is calculated.
The new rules are seen by some as a benefit to employees. Others consider the new rules as a burden to both the employee and the employer. Some say the proposal stops employers from taking advantage of low paid staff and forces employers to pay overtime.
The new rules are seen by some as a benefit to employees. Others consider the new rules as a burden to both the employee and the employer.
Some observers claim that the proposal stops employers from moving people into management positions, limits employer benefits (as employers will classify less people as exempt), and will make employers require more work from employees in less hours.
For small business owners who have classified employees that make less than $50,440 a year, it will definitely increase compliance and administrative costs, as all employees making less than this will need to be reclassified and a strict accounting of hours worked each week will need to be in place.
In a sense, the rule affects all business owners, whether they have employees or not or whether their employees will be affected by this rule. For instance, even if you do not have employees, if you purchase business cards or other services from a business that is affected, your costs could go up.