Overtime Options for Employers


Labor Department

More than 4 million employees would become eligible for overtime premiums under a new final rule issued by the Labor Department. For employers, the additional eligible workers would cause compliance with federal overtime rules to be more important than ever before.

The final rule (RIN 1235-AA11), effective Dec. 1, increases the weekly salary threshold for the executive, administrative and professional overtime exemptions from the Fair Labor Standards Act to $913 from $455. The annual salary threshold for these exemptions increases to $47,476 from $23,660.

In the months before the final rule take effect, some employers are likely to shift employees to hourly status from salaried because it would allow easier tracking of weekly hours. Others indicated they would prefer to offer a small raise to those earning slightly less than the threshold to keep them exempt from overtime.

The Labor Department, in responding the employer queries about how to respond to the final rule, offered a few options:

Increase salary. Employers may choose to increase the salaries of employees to the new threshold or higher to maintain exempt status if the duties test for executive, administrative or professional employees is met. This option benefits employees whose salaries are close to the new salary level and regularly work overtime.

Pay overtime when necessary. Employers also may continue to pay newly overtime-eligible employees the same salary but pay them overtime compensation when hours in a workweek exceed 40. This approach accommodates employees who work up to 40 hours a week but also occasionally exceed that level. In those cases, employers may budget the extra compensation for those periods. Employers should note that there is no requirement to convert employees to hourly from salaried to calculate overtime compensation.

Evaluate and realign hours. Employers can ensure that workload distribution, time and staffing levels all are managed appropriately for white-collar workers who earn less than the salary threshold. In such cases, employers may hire additional workers.

When employees’ schedules are less predictable, employers may choose to implement the fluctuating workweek method. Under this method for calculating overtime compensation, employers generally divide a fixed weekly salary by the actual number of hours worked in the week to determine the week's base hourly rate. Overtime would be paid by adding an extra half-time for each hour worked in excess of 40 in a week. The Fair Labor Standards Act allows this method for certain employees who receive a fixed salary but are not exempt from overtime provisions.

Additionally, employers should require that overtime hours must be approved beforehand by managers.

The Labor Department reminded employers that the new overtime rule broadens the definition of salary basis to allow nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the standard salary test requirement.

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