Overtime Pay Protections: The Impact On Your Practice

June 21, 2016 | Featured Articles

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A fair day’s pay for a fair day’s work.

In 2014, President Obama directed the Secretary of Labor to update the Fair Labor Standards Act, with specific attention to overtime pay protections. This move was in response to the growing number of American employees working more hours and not being compensated for them. Obama said he wanted to “build real, lasting economic security for more hardworking Americans” and ensure “a fair day’s pay for a fair day’s work.”

Fast forward two years and the US Department of Labor has recently announced its final rule updating the overtime regulations. It raises the overtime exemption threshold for “white collar” workers from $455 a week (or $23,600 annually) to $913 per week (or $47,476 annually) and the exemption for highly compensated employees from $100,000 to $134,004 annually. This means that an estimated five million American workers will now be eligible for time-and-a-half pay for hours worked above and beyond the standard 40 hours a week. In the world of medicine, this will likely apply to office managers and medical assistants in practices like yours. The effective date of the final rule is December 1, 2016.

What are people saying?

Proponents of this major overhaul say the change is long overdue. The initial white collar exemption level was set in 1975 and had not changed in forty years. For a family of four today, that $23,600 per-year salary is actually below the poverty line. Supporters also say the new rule will help those who need it the most, namely women and minorities who historically have lower than average median incomes.

But critics say small business will suffer increased costs, tighter budgets, and unexpected layoffs of valuable employees. This will be especially true in workplaces with fewer staff who routinely put in long hours due to the nature of the work. Looking at a survey performed in 2013, for solo practices with up to five non-physician staff members, 30% of doctors said they have cut or frozen salaries in the past five years. In an era when overtime violation claims already top the U.S. Department of Labor complaints list, there is a fear that this change will result in even more lawsuits being filed over wages and hours.

Are you ready?

Everyone agrees that this new overtime compliance challenge is second only to the Affordable Care Act in terms of preparation and thoughtful response. But research is showing that most small business owners aren’t anywhere near prepared. According to the web link above, “only 25 percent of small businesses owners and 50 percent of midsized employers in the United States say they’re aware of and taking actions to comply with the new overtime regulations.”

Simply put, the new overtime rule requires you, as an employer, to start tracking hours for salaried employees who are at or below that $47,476 threshold. If they exceed 40 hours per week, you will need to pay them overtime. We’ve outlined a series of action steps below that can help you manage this big shift in how your employees are compensated for their work.

1. Know your exemption facts

First things first. You need to understand which of your employees this new rule will apply to. Under the Fair Labor Standards Act, employers must pay overtime (1.5 times the regular rate of pay) for each hour worked over 40 in a week, unless an employee is classified as “exempt.” Since 1975, there have been three exemptions (see below). The only one that has changed is the one related to salary level.

Who is exempt?

  • Employees who are paid a fixed salary that is not subject to reduction based on quality or quantity of work performed.
  • Employees whose duties are primarily executive, administrative, or professional.
  • Employees who are paid more than $913 weekly (up from $455).

2. Start tracking hours

HR and payroll experts are advising employers to begin accurately calculating the number of hours worked per week by each employee. As you seek to comply with the new regulations, a paper trail that includes each employee’s current salary, their role, and the number of hours they work, will be essential. Accurate hourly data will allow you to pay your employees fairly according to the new rules. It also means that if an employee ever reports you to the Department of Labor for not following this regulation, you will have clear records you can show in the event of an audit.

3. Explore your options

The new rule will undoubtedly affect your bottom line. HR and payroll experts are advising employers to assess each employee’s labor situation individually. In order to do this, you will need to have accurate employee time data, as suggested above. The amount of hours your employees currently work directly impacts the decisions you make.

Here are some cost-minimizing options to consider:

Implement an automated time and attendance system.

You may want to consider using a system that tracks the number of hours worked and sends you a message when an employee nears the 40-hour-per-week threshold. This would give you the opportunity to make staffing shifts and avoid overtime payments.

Convert to Hourly Pay.

If you have exempt employees who aren’t consistently working 40 hours a week, you may want to convert them to a non-exempt, hourly status. This shift from salaried to hourly might save money if your employees don’t usually put in overtime.

Raise salaries.

Some employers may decide to raise salaries to the new higher threshold, so their employees will continue to be exempt from the overtime rule. You may choose to do this with employees who consistently work more than 40 hours per week, as it could be a less expensive option than paying time and a half for overtime.

Split the job into two part-time positions.

This option would mean significant upheaval for your employees and must therefore be considered Create new policies. If you do none of the above, and your business requires your non-exempt employees to work overtime, you will definitely be out of pocket. There are, however, ways to manage how much this costs you. Consider setting policies in place that your employees need to adhere to when accounting for their time (e.g., using time cards that need managerial approval; prohibiting overtime unless authorized; guidelines for work from home, travel, or meal periods).

4. Be transparent

Although this change to the Fair Labor Standards Act is public knowledge, your employees may not know how the new rule affects them. Communicating clearly and honestly with your employees, especially about how you may need to change the way you do business, will be of the utmost importance. If you have managers, prepare them to answer employees’ questions. And be clear, preferably in writing, about anything new that your employees need to be aware of or need to do differently (e.g., processes for tracking hours or policies around overtime).

5. Educate Yourself

Depending on the size and complexity of your practice, you may need to seek assistance from human resources and employment law experts. For the do-it-yourselfers, there are online guides from companies such as ADP, available to help you understand what you need to do in order to comply with the changes to the Fair Labor Standards Act. There are also online calculators to assist you in figuring out what your costs will be.

Start now!

The new rule goes into effect on December 1, 2016. Once the final rule is issued, employers will have 60 days to comply. This means the time to start tracking hours and making important decisions is now!