New Overtime Rule Presents Big Challenge to Small Businesses
The first step: Conduct an internal review of all employee classifications.
The Department of Labor’s new rule regarding the overtime provisions of the Fair Labor Standards Act will go into effect Dec. 1, which the DOL projects will impact 4.2 million workers across the country.
This rule will impose a substantial increase in the minimum annual salary that must be paid to employees to qualify for certain exemptions from the FLSA’s overtime pay protections from $23,660 to $47,476.
Small and midsize businesses in particular will feel the fallout from the change, as classifying and managing employees becomes much harder. What can businesses do to prepare for the change and make the shift to compliance as painless as possible for their companies and employees?
Here are three key steps businesses can take to prepare for the upcoming deadline. Keep these best practices in mind through this legislation change and beyond.
Classify Workers Correctly
The first step toward achieving compliance is to consult with your legal counsel and conduct an internal review of employee classifications to ensure that employees are properly classified as exempt or non-exempt based on the various requirements outlined by the Department of Labor and state wage enforcement agencies. The review should focus not only on the upcoming new minimum required salary but also on the associated duties tests that correlate with each exempt category. Keep in mind that there are federal and state standards that govern the proper ways to classify members of your workforce, and, when these laws differ, an employer should comply with the standard that is most protective to employees.
Misclassification of employees can cause challenges and business disruption — not to mention serious financial consequences — and small businesses are especially prone to misclassification errors. Don’t take shortcuts around classification to save costs for your business.
You may need to adjust how your employees are paid depending on whether they are exempt or non-exempt. If any employees are mislabeled, reclassify them as needed, and set a schedule to regularly monitor classifications in the future should any changes need to be made.
Once your classifications are up to date, offer training to your workforce to explain the changes. Sometimes there are misconceptions about working on an hourly basis, tracking overtime, and qualifying for exemption status that employers should work to dissolve as they shift employees into new classifications. Inform your workforce that each category offers certain protections to their employment status and ensures the company and its employees receive maximum benefits. Explain how classification affects more than the rate at which individuals are paid; it can also affect employees’ eligibility for benefits and insurance.
Fully brief your workers on the overtime rule. Ensure that your employee training touches on the following topics:
- The changes going into effect.
- The timeline for when these changes will take hold.
- How the changes will affect workers.
- What each category means.
- The benefits and opportunities offered to workers in each classification.
Your training should clarify any new job or skills requirements for various levels of employment. For example, newly non-exempt workers will need to be trained on how to accurately track and record work time. Employee supervisors will also need training on managing labor budgets with an overtime wage component, determining appropriate wage rates and minimizing potential claims for back overtime wages. Questions will undoubtedly arise after formal training has been completed, so give your employees a go-to resource and contact for inquiries about exemption status in the future.
This proactive approach should help mitigate your workers’ concerns and reduce inbound questions about employment status once Dec. 1 arrives and the new rules take effect.
Use Tools to Track and Manage Compliance
Finally, once your employees have been appropriately classified and effectively communicated to, move forward with the implementation of the new regulations. Find or develop tools and workflows that enable you to easily monitor your workers’ classification status and hours worked, and gather an accurate, holistic view of your staff.
Train your non-exempt employees on how to accurately track their regular and overtime hours where applicable. Put a system in place that ensures compliance with your own time tracking protocols.
Use a system that allows you to manage multiple payment schedules and a mixed workforce — including exempt, non-exempt, salaried, hourly and contracted workers — to simplify your workflow. Look for an employee management tool that allows you to classify workers accordingly and run reports on your workforce to periodically confirm workers are classified correctly.
The world of work is constantly evolving, and the gig economy built on contractors and freelancers is driving massive compliance changes for businesses. Keep a close eye on legislation affecting the workforce, and consider how any future changes might impact your business and your staff. At the end of the day, not paying attention to the ever-changing laws around compliance is the biggest risk you can take for your business.
Isaac Oates is the founder and CEO of compensation and benefits software provider Justworks.