Under the Fair Labor Standards Act of 1938, commonly referred to as FLSA, the new overtime pay regulations are a game changer for Illinois small businesses. It’s not as simple as deciding to increase pay or reclassify employees as non-exempt. There’s other concerns that small to mid-sized companies need to consider before the December 1, 2016 deadline.
Quick intro to terminology
FLSA dictates who is eligible for overtime pay. As you research the ruling’s impact, familiarize yourself with the official terminology being used.
- Non-exempt – Employee earns an hourly wage or salary equivalent and receives time and half payment for all physical hours worked over the per day or week maximum as dictated by your business’ state laws. They are required to maintain time records and their pay can be docked if arriving late, leaving early or not showing up.
- Exempt – Employee earns the minimum salary for overtime exemption. Their position must meet all required “duties” to be classified as exempt. They are not required to maintain time records and they cannot be docked for late arrival, early departures and often must be paid their full salary, whether they work the full week or not.
- “Duties” test – This is the part of the law that is most often violated. Executive, Administrative, Professional, Computer and Outside Sales jobs have specific duty requirements.
The exemptions under FLSA are ONLY applicable to “white collar” employees who meet both the salary and duties test.
The new overtime requirements present a challenge for small businesses. A methodical approach will help to minimize disruption and remain compliant.
- Monitor employees to better understand the current amount of overtime being worked.
- Assess the financial impact of each pay structure:
- Increase salaries to the $47,476 cutoff. This is the minimum salary for overtime exemption.
- Convert salaried employees to hourly where they’ll be reclassified as non-exempt. This makes them eligible for overtime pay.
- Keep salaried employees at their current pay level but reclassify them as non-exempt. This makes them eligible for overtime pay.
- Before making your final decision, it’s critical to understand any unexpected ramifications for each pay structure (detailed below).
Bump up salary – Does paying lower-level employees more lead to pay compression and force pay adjustments up the line? If employers don’t adjust salaries higher up, make sure there’s a communications plan in place to handle those employee frustrations.
Convert to hourly – The new wage should be equivalent to salary with current overtime calculated in. If there are any company cutbacks and overtime gets reduced, however, employees will end up losing money. Reclassified employees will now need to track time, even if it’s performed remotely. While this may be interpreted as a demotion, a less flexible work schedule can mean a more defined work/life balance for employees resisting the change in status.
Consider a hybrid option – Shifting a valued employee from salaried to hourly might be too risky. Another option is to keep them as a salaried employee plus pay for any overtime hours worked. This is referred to as salaried nonexempt. If used, some experts recommend prepopulating timecards with 40 hours assuming employees will work their usual 40 hours. If overtime work is required, that will need to be approved in advance.
Transform your work culture
Change is always challenging, but the new ruling can be a catalyst for innovation. Look for opportunities to collaborate and work smarter. Just because “it’s always been done that way” doesn’t mean it can’t be modified and improved.
Headquartered in Illinois, MidwestHR specializes in helping small to mid-sized companies tackle this type of urgent ruling. By outsourcing your payroll, our team of experts will develop an action plan to address the overtime ruling customized to your business. We are now accepting new clients.