Last month, May 2016, the Department of Labor (DOL) issued final rules changing who will receive overtime pay for hours worked beyond the standard 40-hour workweek. Effective December 1, 2016, these rules will affect the majority of employers. Employers need to prepare and be knowledgeable concerning these upcoming changes. Below is an overview of how companies will be affected, the potential impact the new rules could have on people, and ways to have a smoother transition.

Non-exempt vs. exempt

To make it simple, the main change in the overtime rules is the threshold that someone must be over to not have to get paid overtime. Until December 1, 2016, “non-exempt” employees are those who earn $455 a week ($23,660/year) or less, and employers must pay them at least the hourly minimum wage plus time and a half for all hours beyond forty. Employees who earn above this threshold and satisfy other requirements are “exempt” and are not required to be given overtime pay. However, this threshold will be lifted substantially in December; employees that earn $913 per week ($47,476 annually) or less will be required to be given overtime pay. For more details, check out the U.S. Department of Labor page on the Final Rule.

Changes employers will have to make

For employees whose salaries will fall below the new minimum, to comply with the new changes employers will generally either have to raise employees’ salaries to the new requirement, or reclassify the affected employees as non-exempt, convert their salary to an hourly wage, and pay them overtime for time worked beyond 40 hours/week.

It will usually make more sense to reclassify employees as non-exempt if their salaries are closer to the current minimum, especially if they rarely work overtime. However, when calculating the cost of raising employees’ salaries to the new minimum, be sure to take bonuses, incentive payments or commissions into account; 10% of these payments can count towards the minimum requirement.

Image from https://www.dol.gov/featured/overtime

Potential impact

These changes in overtime pay will inevitably have some interesting effects on employers, employees, and their interactions. Employers will have to have conversations with their employees that switch from exempt to non-exempt about how to manage their work hours; people who haven’t had to worry about hours in years will have to start keeping track again.

There will likely arise situations in which some members of a team are above the new threshold and some are below, but managers will still need to ensure the same team work output without costing the company more money. Naturally, the salaried employees’ workload will increase in order to avoid having to pay the non-exempt employees overtime. This will result in everyone being able to see who is above the threshold and who is below, increasing pay transparency. Hard feelings could arise; people above the threshold could resent not getting paid overtime like some of their coworkers. In the meantime, people below could get mad about having a lower status than those above. Unfortunately, there is a stigma around having to track hours that might make the newly non-exempt employees feel like they are in a way going backwards in their status at work.

These potential conflicts are something to be aware of in advance. These changes will require more communication and, likely, increased transparency.

Tips for a smooth transition

• Be open and available to answer questions. You might have to face some disgruntled employees, and difficult conversations may arise. However, it  is against the law to prohibit discussions regarding pay. The law aside, poor communication tends to just make problems worse. Therefore, prepare yourself and set aside time to address concerns.
• Communicate with your employees about these changes in advance. They are getting a lot of attention, and employees are likely wondering how they will be impacted. You have time to assess your options and decide how your company will adjust, but don’t wait until December to notify your employees of the upcoming changes. In the meantime, address the topic and explain that you are in the process of evaluating and preparing and you will inform them when decisions are made.
• Look into and comply with state laws concerning notice requirements. Some states require employers to inform employees about pay changes a certain number of days in advance. For example, New York, South Carolina, and Nevada require a written notice be given to employees seven days before a pay reduction. Some states require 30 days notice, others require one pay period’s time, etc. Make sure you know what kind of timeline is required of you so you don’t face any legal consequences.
• If you think it would be better for employee morale, you could continue to pay reclassified non-exempt employees on a salary basis. However, their hours would still need to be tracked and overtime paid when applicable. Explaining the potential benefits to the reclassified employees could also help them accept the changes a little better; their work/life balance could improve by working less hours, or overtime pay could be received in which case their income would increase.
• Deliver a carefully crafted message to employees going over the changes. Take this opportunity to not only inform and explain, but to put the changes in a positive light and help employees take the news well (especially those who will be reclassified and might see the change as a demotion). Emphasize that they are necessary changes to comply with a new government rule, and have nothing to do with performance. Also include how they will be impacted and who can answer questions they may have.
• Do the necessary trainings. Train reclassified employees on your system used to track hours, inform them about the FLSA’s rules on breaks vs. productive time for hourly paid employees, and train supervisors on the new rules so they can answer questions accurately and assist in monitoring time to prevent overtime work if needed.

Take the time needed to prepare your company for these changes and make the transition as smooth as possible.