Final Rule on Overtime Regulations and How It Impacts Employers
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Last Updated: 07/07/2022
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The U.S. Department of Labor (DOL) announced that a proposed new overtime rule will be released, and now is expected in May 2023. The current Final Rule on Overtime has been in effect since Jan. 1, 2020, and, at the time of its implementation, made 1.3 million American workers newly eligible for overtime.
This article will review some of the topics regarding overtime that businesses should know.
What is Overtime Pay?
Overtime pay is one and one-half times an employee’s regular pay rate for every hour that is worked beyond 40 hours in a workweek. There are exceptions because not everyone is eligible for overtime pay, including exempt employees. There are also different types of overtime (e.g., tipped employees) and rates that can vary between states and cities.
What Businesses Are Required to Pay Overtime?
Any business covered under the Fair Labor Standards Act (FLSA) is required to pay non-exempt employees overtime pay.
A business with two or more employees (Enterprise Coverage) is covered by FLSA if:
- They have annual sales of at least $500,000
- They engage in running a hospital or facility that cares for the sick, aging, and mentally ill; provide education (preschool through institutions of higher learning)
An employee does not have to work for a business with Enterprise Coverage to still be covered under FLSA. There is also Individual Coverage available to protect non-exempt employees if:
- Employee activities include conducting business between states, including sending mail or making phone calls to persons in other states, and handling goods moving into the state or out of the state.
The law, generally, also covers housekeepers, cooks, and other domestic service workers.
Do Small Businesses Have to Pay Overtime?
Some smaller businesses that don’t meet the specifications to be covered by the FLSA still might have obligations under their state’s overtime law, as well as an obligation to pay overtime to a non-exempt employee who is covered under the Individual Coverage rules. Employers should consult legal counsel and their state labor department to understand any additional requirements.
How is an Employee Classified as Non-Exempt or Exempt?
An employee’s eligibility for overtime pay is based on employee classification — exempt and non-exempt.
Non-exempt employees must be paid at least the minimum wage for all hours actually worked and must be paid the appropriate overtime premium when they work more than 40 hours in a workweek. Again, employers should be aware if their state has additional obligations, such as California, which requires employers to pay overtime to an employee who works in excess of eight hours in a workday, as well as for the first eight hours on the seventh consecutive day worked in a workweek.
An exempt employee typically works in a professional, executive, or administrative position and meets the following three requirements: their earning level meets the standard threshold ($684), they are paid on a salaried basis (e.g., salary isn’t reduced based on quality of quantity of employee’s work), and they perform job duties considered exempt.
- Professional exemption: Primary duties involve consistent exercise of discretion and judgment requiring an advanced degree or their work involves invention and originality.
- Executive exemption: Primary duty involves managing or supervising two or more full-time employees or their equivalent with authority to hire and fire or whose recommendations regarding hiring and firing are given particular weight.
- Administrative exemption: Primary duties involve non-manual work that helps in managing the business, requiring the use of discretion and independent judgment.
There are additional exemptions, including for Outside Sales, Computer employees, and Highly Compensated Employees (HCEs). More details on the duties for employees who fall under those exemptions can be found on the DOL Fact Sheet #17.
What Are the Current Federal Overtime Rules?
When the FLSA overtime rule changes went into effect in 2020 they included:
- An increase to $684 per week for the standard salary level, up from the previous level of $455.
- An increase to $107,432 per year for the total annual compensation requirement for “highly compensated employees” (HCE).
- Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.
- Revising the special salary levels for workers in U.S. territories and the motion picture industry
- The special salary level in American Samoa remained at $380 per week, while a special salary level in Puerto Rico, Guam, the U.S. Virgin Islands, and the Northern Mariana Islands was set at $455/week.
- The special base rate threshold for employees in the motion picture industry increased to $1,043/week.
Notably there were no changes to the job duties tests, but the DOL indicated plans to update the standard salary level on a more regular basis.
Can Employers Refuse to Pay Overtime?
No. Employers covered by FLSA are required to pay the applicable overtime premium to non-exempt employees for all hours worked over 40 in a workweek, even if the work resulting in overtime was not authorized.
As an employer, you can implement a policy that prohibits unauthorized overtime, and an employer may discipline, up to and including terminating, an employee who consistently violates company policy. However, if a non-exempt employee does work overtime then they must be paid at the applicable overtime rate.
The risk involved in not paying an employee overtime can be substantial. You could be required to pay back wages, fines, and possibly the employee’s legal fees. According to the DOL, fines can be up to $1,000 per violation, plus, depending on your state’s laws, you might be at risk for additional penalties.
Can an Employee Refuse to Work Overtime?
The simple answer is yes. An employee can refuse to work overtime but must be mindful that in “at-will employment” states, they can typically also be fired for refusing their employer’s request. There are exceptions in some states. For example, California has a one-day rest rule that prohibits an employer from requiring an employee to work more than six consecutive days in a workweek.
How Could Future Changes to Salary Thresholds Impact Employers?
Employers might need to make some decisions that best suit the financial needs of their business if the federal rule on overtime regulations is changed. An employer could transition employees from exempt to non-exempt or increase salaries. However, any change could impact the business in unintended ways. Transitioning employees from exempt to non-exempt status could:
- Increase overtime expenses
- Affect employee morale and/or turnover if such changes are perceived as demotions
- Change benefits (e.g., paid time off tied to compensation levels and employee classifications)
- Impose additional recordkeeping requirements.
Employers might consider a cost control measure such as establishing a Safe Harbor 401(k) plan that can exclude overtime from the definition of compensation. However, excluding overtime can be a risky move because the compensation taken into account under the plan must satisfy nondiscrimination testing requirements.
Employers also could face litigation from employees who have their classification changed if they believe they should have been non-exempt the entire time and are now due backpay for overtime worked.
Let’s say you opt for an increase in the salaries of impacted employees. With salaries going up, there exists the possibility that budgetary constraints might force the business to downsize. Wage compression also could result, where employees who received raises due to an increased salary threshold are earning the same, or similar, pay as employees with more experience, creating dissatisfaction and potential morale issues.
Stay Up to Date on U.S. DOL Overtime Rules
Employers have a great deal to keep track of when running a business. For example, they need to know the details of how employees are classified to determine whether they are non-exempt or exempt from minimum wage and overtime provisions of the FLSA. Employers also need to stay up to date on how potential changes to the federal overtime rules in the future could impact their business. Consider how a payroll service provider such as Paychex could alleviate some of the work and give you time back to grow your business.