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As most people know, overtime law provides that hourly workers must be paid “time-and-a-half,” or 1.5 times their hourly wage for hours worked in excess of 40 hours per week. Generally, employers are exempt from paying overtime wages to salaried workers. In order to prevent employers from abusing this exemption, the Department of Labor has long had a threshold so that salaried workers below the overtime threshold must also get overtime pay. In other words, an employer cannot simply make a certain level of wage earner salaried in order to skirt the overtime requirement.

Effective December 1, 2016, the new salary threshold is $47,476.00 or $913.00 per week. This is almost double the current threshold of $455.00 per week. Current estimates indicate that the new rule will directly affect approximately 4.2 million salaried workers who will now be newly eligible for overtime pay that currently have salaries that fall between the old and new thresholds.

There is also a mechanism in place to adjust the new threshold every three years to the 40th percentile, full-time salary of the lowest paid region (i.e. the South). The Department of Labor estimates that the new rule will cost employers $1.5 billion per year. $1.2 billion in new overtime pay and $300 million in administrative expenses related to implementation of the change.

It remains to be seen how this new rule will work in the real world. There is some expectation that some newly exempt employees will now be working fewer hours but receiving the same pay. Other hourly employees who are close to the current threshold may receive a salary bump to push them over the new salary threshold. The Obama administration is counting on the hiring of more straight-time workers by employers who want to avoid the higher overtime costs.

It is hard to argue that the old rule remained stagnant for too long and needed to be updated in some way. However, the downside of the new rule, as designed, is that it could have a detrimental effect on small businesses. For small businesses with fewer employees and locations, overtime can be costly when operating on a small profit margin. Occasional heavy workloads can be vital to the success of a small business. This could lead to tighter budgets or layoffs of valuable employees who are no longer over the salary threshold amount. Rural businesses may have this issue compounded where salaries in the $30,000 to $49,000 range provide a comfortable living in small towns with lower costs of living.

These rules are yet to be implemented and may be subject to change prior to the December 1 effective date. If you have employees who fit within the new guidelines, make sure that you seek advice and are ready for the change when it occurs.