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Not sure about how the new overtime rules affect your business? This article explains the ins and outs of the new overtime rules and what you need to know about overtime pay for salaried employees.
What are the new overtime rules?
As of December 1, 2016, employees earning under $47,476 per year became eligible for overtime pay. This salary threshold will be reevaluated every three years.
Why were new overtime rules being introduced?
The law is designed to help ensure that more people are paid fairly for their hard work. Under the new law, over four million salaried workers may be eligible for overtime pay. These workers were previously not eligible for overtime pay because they were paid an annual salary of at least $23,660, the previous minimum threshold for salaried employees.
How do the new overtime rules work?
Under federal law, all employees are considered eligible for overtime pay, unless the employee’s job meets certain requirements, including being paid above a certain amount. If the job meets those requirements, the employee is considered “exempt.” Here is more information on what types of jobs may be considered exempt. However, this information is limited to federal law and certain states have different legal requirements.
Under the new overtime rules, if you have employees whose annual salary is less than $47,476, ($913 per week), those employees will be eligible for overtime pay.
How does overtime work?
Under federal law, overtime is paid at one-and-a-half times the employee’s regular rate of pay (also known as time and a half) for hours worked above 40 in a workweek. Under certain state laws, you may be required to pay overtime for work over a certain number of hours in a workday.
Different states have different overtime requirements, so make sure you know the rules where you’re located. To determine the overtime rate, you must also take bonuses, commissions, and other compensation into account. Of course, to comply with federal and state overtime requirements, nonexempt employees (that is, employees who are eligible for overtime pay) need to accurately record all time worked.
Here are the old and new cutoff points:
Old threshold
$455 per week (or $23,660 per year) — Before the new overtime rules, employees who earned less than this amount were eligible for overtime pay.
New threshold
$913 per week (or $47,476 per year) — Now, the new overtime rules state that employees who earn less than this amount are eligible for overtime pay.
Exempt vs. nonexempt: understanding new overtime rules
Employees are either classified as exempt or nonexempt. Exempt employees are not eligible for overtime pay. Nonexempt employees are eligible for overtime pay.
Exempt employees don’t get overtime pay and are paid a set amount regardless of the amount of hours they work. To qualify as exempt, an employee must be paid a salary of at least $47,476 per year ($913 per week) and meet other legal requirements. Here is more information on how to determine whether your employee can be classified as exempt.
If your employee does not qualify as exempt, they are nonexempt, which means they are eligible for overtime pay and other protections of the wage and hour laws. For more information on how to calculate overtime pay, refer to your city or state’s requirements.
How does overtime pay for salaried employees affect my business?
If you have exempt employees whose salaries don’t meet the new federal minimum, you need to decide whether to increase their salaries to the new minimum threshold or reclassify them as nonexempt.
If employees work a lot of overtime (and it can’t be avoided or reduced), it may make sense to increase their salary to the new minimum threshold. That way employees will continue to be exempt and will not be eligible for overtime pay. Remember, you still need to make sure your employees meet the other requirements to be exempt.
However, if overtime isn’t necessary for the job, converting employees to nonexempt may be the best choice. Nonexempt employees are also subject to other legal requirements like taking meal breaks and rest periods, under applicable state law.
Because there are different federal, state, and local laws, figuring out whether your employees are correctly classified as exempt or nonexempt and ensuring they’re paid correctly can be complicated. Since you’re legally responsible for doing this right, be sure to talk with your lawyer.
How do the new overtime rules affect employees?
The new overtime rules are designed to help employees by potentially making over four million people newly eligible for overtime pay. Their employer may choose to give them a raise to bump them to the new salary threshold. If their pay stays at the same rate, they’ll get paid more for overtime work.
If employers choose not to give them a raise and don’t want to pay overtime, these employees should no longer work overtime, which will result in better work/life balance. In any of these scenarios, these employees should be better off thanks to the new overtime rules.
How are “Highly Compensated Employees” affected?
The new overtime rules also affect who qualifies as a “Highly Compensated Employee” (HCE). If you’re a larger business owner and want to learn more about how this affects you, read more here.
How do bonuses and commissions affect the new overtime rules?
One final change in the new overtime rules is that in some instances, employers may be able to count certain nondiscretionary bonuses and commissions toward up to ten percent of the new minimum salary threshold. Talk with your lawyer to determine whether your bonuses/commissions qualify.
FAQ
How do I know if my employee is nonexempt or exempt?
Under federal law, all employees are considered nonexempt, and therefore eligible for overtime pay, unless the employee’s job meets certain legal requirements, including being paid more than a certain amount.
For jobs that meet those requirements, the employee is exempt. Learn more about the difference in job types for exempt and nonexempt employees here. Keep in mind, this information is limited to federal law and certain states have different legal requirements.
What do I need to do if my employee is nonexempt?
If you have nonexempt employees, they are eligible for overtime. You need to comply with other state law wage and hour protections such as meal breaks and rest periods. All nonexempt employees need to track their hours, so it’s important to have a system in place for recording time worked.
Your employees can clock in and out of the free Square Point of Sale app, and Square Payroll automatically calculates overtime when you import employee timecards.
It’s also your responsibility to know which overtime regulations apply to your business. For example, overtime rules vary by state, city, and industry. Again, if in doubt, talk with your lawyer.
