Many Grand Rapids businesses are asking a lot of questions about the new overtime laws, but the number one question being asked is, “How do I deal with the changes to the overtime laws?”
The “new” rules are not actually new. The Fair Labor Standards Act (FLSA) has always required that employees be paid at least the Federal Minimum Wage and receive overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a work week.
The impact on many small businesses is the change to the section of the FLSA that is commonly referred to as the “white collar” exemption. Under the current rules, any employee receiving a salary over $23,660 a year could be considered exempt and employers do not have to pay overtime. After December 1, 2016, if an employee earns less than $47,476 a year, he or she is eligible for overtime. (It should also be noted that the employee must perform executive, administrative or professional duties in order to fully qualify for the “white collar” exemption.)
So with thousands of employees about to become eligible for overtime (and wages that most small businesses cannot afford), what are some of the ways that a small business can legally avoid paying overtime?
1. Two Employees For One Position
It may seem counter-intuitive to hire another employee in order to keep payroll under control, but this is an option. For a managerial position that requires working 50 hours per week, you could reduce the current manager’s hours to 25 and add a second manager to work the other 25, which would avoid exceeding the 40-hour maximum work week.
Obviously, this option does come with certain drawbacks. The manager that is making $40,000 per year and is fine working 50 hours per week for that compensation is not going to be happy to have his or her hours cut in half and thus only receive $20,000 per year. This may cause some turnover. Employees attempting to “waive” their rights to overtime pay is not a solution. Even if such “waiver” is put in writing, it will not likely preempt the FLSA.
2. Convert Employees to Independent Contractors
This may be a bit of a tenuous solution and should be entered into carefully. Independent contractors are not eligible for overtime pay unless they negotiate such payment terms in the agreement with your business. This means that if an independent contractor works 50 hours in a week, the rate of pay stays the same.
So let’s convert all our employees to independent contractors, right? Not so fast. There are many different regulatory bodies that could possibly look into your business’ relationship with its labor force. If they determine that your independent contractor labor force is actually being treated as employees, which can mean even steeper fines and costs than you would incur with paying the overtime.
Even if you do operate accordingly and your workforce is mostly independent contractors, that can be problematic for your business. That will mean you have less control over your workforce, they can come and go as the please, you are limited in the equipment and training you can provide them, they can openly work on other projects or for other companies and they may not have to comply with your policies and regulations. Could you imagine hiring a manager for a retail shop or a restaurant as an independent contractor and you have little control over when they are actually in the store or restaurant? This may not be a great solution to the overtime rules.
3. Change The Employee’s Compensation
This could work in one of two ways. In the first, an employee that is currently making $45,000 per year could receive a pay increase to surpass the $47,476 minimum. This would make that employee exempt under the new law. This $2,500 is a simple solution to become compliant with the new overtime laws while also allowing you to conduct business as usual.
The second way is to provide compensation for a position with the understanding that a certain number of overtime hours will be worked on average. For example, under the new overtime laws, you could hire someone for a position that typically requires 50 hours per week at a salary of $40,000 per year, but instead pay them $30,000 per year and allow that employee to work 10 hours of overtime per week. Over the course of a year, this will approximate to $11,250 in overtime pay, in addition to the $30,000 salary. Thus, the compensation for this position is approximately the same and also compliant with the new overtime laws.
4. Strictly Enforce Work Limitations
Another option is to develop a strict policy to limit the number of hours an employee may work. Some policy terms could include mandatory lunches, limiting working from home, and clocking in and out at the office. These restrictions and limitations can be tough to enforce. With technological advancements, emails, virtual meetings and other forms of communication outside of work have become commonplace. Whether an employee sending late-night emails to clients qualifies for overtime is debatable; the issue is how to prevent those activities and thus eliminate the need for that debate.
Some employers have developed a system of fining employees for violating these policies. Forcing employees to comply with these policies provides businesses with the means to offset overtime wages.
This last option can create a stressful work environment. When employees are pressured to get their work done in a finite amount of time, and management constantly polices their employees’ behavior, the company culture can quickly become a trouble spot for the business.
The time to plan for these coming changes is more than upon us. Lawsuits by employees against their employers for overtime law violations are a staple in our court system. Being ignorant of the law or not being fully compliant will not shield your business from potential liability.
While there may be other options to be explored, and there are still unresolved questions about the changes, the emphasis should be on being compliant. For more information on ensuring your business is compliant with the new overtime laws or to check out other free resources for your small business, contact The Business Law Group today.