New Overtime Rule to be Published in the Federal Register
As most employers know, employees are paid differently based on status: exempt employees and nonexempt employees.
Exempt employees are generally paid on a salary basis and are paid to get the job done, regardless of how much time it takes. They are not eligible for the time-and-a-half overtime rate for hours worked over 40 in a workweek. To determine whether an employee’s position is exempt, the position must pass two tests: the duties test and the salary test. The duties test determines whether the position falls into an administrative, executive, professional, outside sales, or computer employee category. The salary test is the minimum salary required for the position that will qualify the position for exemption.
Nonexempt employees typically work on an hourly basis, although some are paid a salary. They are entitled to overtime pay at the rate of time-and-a-half or their regular rate of pay for all time worked over 40 hours in a workweek. Nonexempt employees are all employees who do not meet both the salary and duties test for exemption.
The current salary threshold to qualify as an exempt employee is $684 per week, or $35,568 annually. When the new Overtime Rule is published in the Federal Register, the new salary threshold will be $1,059 per week, or $58,656 annually. The minimum salary threshold will be automatically increased every three years.
The Department of Labor’s final rule cleared the White House on April 11 and must now be published in the Federal Register to take effect. The Department of Labor has predicted that the publication will occur in April.
So what does this mean for your business?
Employers in the construction industry have been qualifying managers, site supervisors, and project managers as exempt for years. And rightly so-the individuals in these positions supervise other employees, manage their own departments, hire, fire, and discipline. At a current annual salary of $50,000, they meet both the salary and the duties tests and many employers would believe workers in these positions are fairly compensated for the job duties they perform. But when the new overtime rule is published, you have no choice but to either bump up the salaries of those who oversee construction workers and report on the status of the project or concede that they are nonexempt and pay them at the overtime rate for all hours worked over 40 in a workweek. Forty-five- and 50-hour workweeks are not uncommon for those supervising construction sites, ensuring safety procedures are followed, accounting for employee attendance, reporting on status to project managers-that time adds up! You will feel the financial impact on every project, no matter what road you choose.
Assistant general managers and general managers in the personal services industry can also pose a problem for their employers. AGMs and GMs typically report directly to the owner of a franchise, and this franchisee is already operating on narrow margins and trying to keep costs down. These AGMs and GMs, who supervise hair stylists, estheticians, and others in the health and beauty industry, were brought on at a salary of $684 per week. The AGMs and GMs believed that was a fair wage for the duties they took on, including supervising performance, discipline, assisting with payroll and deposits, scheduling, and customer service. They may have received wage increases and be making a salary of $50,000 annually. Franchisees organized their business plans around having exempt employees at or above the former salary threshold. Now they must decide whether it is financially feasible to keep both GMs and AGMs on, to bump up their salaries or pay them hourly with overtime, or for the franchisee to take on a more active, time-consuming role within the business themselves, which may not have been their expectation when purchasing the franchise and increases the hidden cost of personal labor on behalf of the franchisee. When $50,000 isn’t enough, and AGMs and GMs are required to put in more than a 40-hour workweek, the employer will be paying time-and-one-half on all hours worked over forty, even though they are still making the hourly equivalent of $50,000. You can drop their rate of pay in an attempt to make up for the difference but be prepared to have a sharp decrease in morale and massive management turnover.
Restaurants will also feel the impact of the new Overtime Rule. Restaurant managers also assist staff in performing their duties in addition to management duties. That will easily add up to more than 40 hours in a workweek. Restaurants have been able to keep labor costs manageable by paying managers an annual salary of $45,000, for example, to get the job done, regardless of how many hours these managers worked. With the new Overtime Rule, restaurant or franchise owners will have to figure out how to break even without narrowing their margins on labor costs or losing good managers to other restaurants who are willing to pay overtime or pay the new salary threshold. Remember, managers are not allowed to participate in tip pooling or sharing, so that is not a place to find income for the manager. Restaurants large and small, corporate-owned or owned by franchisees, will feel the hit with the new Overtime Rule, in labor efficiency, margins, and good employees being poached by other restaurants with the resources to keep the managers salaried.
The new Overtime Rule does not affect just one type of industry or employee. This Rule, when published, will spread through most industries like wildfire. It’s important to have a licensed attorney to help you remain compliant with the new Overtime Rule to avoid both state and federal wage claims. The expert employment attorneys at myHRcounsel can help you understand the new Overtime Rule and how to comply. If you are already a subscriber, you can login and open a ticket at any time. To learn more about our unlimited access to employment attorneys for an affordable subscription, request a demo or contact us at info@myHRcounsel.com.