How Overtime Rules Overhaul May Impact Small Businesses

On March 13, President Obama signed a presidential memorandum that directs the U.S. Department of Labor to propose new rules governing overtime exemption regulations for white collar workers under the Fair Labor Standards Act (FLSA).

The Presidential Memorandum instructs the Secretary of Labor to update the FLSA regulations for workers who qualify for overtime protection, stating that these exemptions “have not kept up with our modern economy. Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage.”

The salary threshold for overtime pay eligibility has been at $455/week since 2004, making the annual threshold $23,600 for the white collar exemption.  The “primary duty” test that determines whether workers are managers was also last revised in 2004.

Labor Secretary Tom Perez said that new rules governing overtime exemptions are due for an update because “quite literally somebody can work 1 percent of their time on management issues, 99 percent stacking the shelves and doing other work that has nothing to do with management, and you’re considered a manager, and you are no longer entitled to overtime.”

The three areas that are likely to be the focus of new regulation include:

Change to minimum salary level.  The new regulations will likely change the minimum salary level for overtime exempt employees, and may tie those increases to inflation indexes as well as mandate an annual cost of living adjustment.

Change to duties test.  It is likely that the DOL will either remove or make significant changes to the duties test, particularly the “concurrent duties” section of the executive exemption test that provides an exemption for managers performing the same duties as the employees they manage.

Change to computer professional exemption.  The 2004 overtime regulation updates included a separate computer professional exemption; with the significant changes in the technology field in the past decade, the DOL is likely to readdress the qualification standards for meeting this exemption.

The effect on small businesses won’t be known until the DOL makes its recommendations, but the new rules could make millions of employees eligible for overtime pay by setting a new standard for the white collar exemption.  Business groups are arguing that this move would eventually hurt workers and the economy, since employers will likely scale back hours to avoid paying overtime.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.  Normally, this session is $1,250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.