Dilemma of the Month: New Overtime Laws

Back Q&A Jul 18, 2016 By Suzanne Lucas
I’m a business owner in California and I’m worried about the impact of the new overtime wage rules in the federal Fair Labor Standards Act. How can I best prepare my business for the changes caused by the regulations?

You have probably heard about the new rules regarding exempt and non-exempt employees.

Exempt employees are paid the same salary, regardless of how many hours they work. They aren’t eligible for overtime. Non-exempt employees are paid by the hour and receive overtime pay for working more than 40 hours in a week, or more than eight hours in a day in California. The new rules are scheduled to be put into effect on Dec. 1. Your business will probably be affected, so here is what you need to know.

Related: How To Handle The New Overtime Wage Rules.

Right now, the federal minimum salary level for overtime exemption is $23,660, but that number is jumping to $47,476. California has its own minimum salary for overtime exemption of $41,600. So, for most of the country, this is a huge change. For California, it’s a mild change that shouldn’t cause too much angst. Regardless, California businesses now have to comply with the higher federal level.

Take your employee list and pull out every exempt employee earning less than the new threshold. It doesn’t matter that their job descriptions have made them eligible for exemption before; as of Dec. 1 that won’t matter. All of these employees will be non-exempt.

Right now, the federal minimum salary level for overtime exemption is $23,660, but that number is jumping to $47,476 when the new rules are scheduled to be put into effect on Dec.1.

Most employees see non-exempt as a lower level of job than an exempt one, and they might feel like they’ve been demoted. You’ll need to explain clearly that this is not a demotion but merely a status change. You can end up in a situation where two people with the same title and responsibilities can have different statuses — one making $47,000 is now non-exempt, while the person with a higher performance rating is making $48,000 and remains exempt.

It probably makes no sense to have that situation, so you might be tempted to just raise the one person’s salary to be over the threshold. This is a great idea, but be careful — if it’s more than a few dollars, you’ll also need to give raises to her peers who are above the threshold. Why? Because nothing is more demoralizing than having your co-worker just handed something you had to earn.

Here are your options:

Give everyone a raise. California has it a lot easier than the rest of the country, as there’s only a small range to meet. If you’re in Michigan, it’s not a good idea to raise your employee’s salary from $30,000 to $47,476 unless you have unlimited funds, but in California, it might make sense to give a $5,000 raise to someone to bring them over the threshold.

Switch to an hourly pay rate. If your employee doesn’t currently work more than 40 hours a week (or eight hours in a single day, in California), then it makes sense to simply divide the current annual salary by 2,040 (number of hours in a 52-week year) and make that the hourly rate. If your employee frequently works more than 40 hours a week, you can calculate a new salary by figuring out what the hourly rate plus overtime would be to equal his current salary. Your employees may balk at this as on slow weeks, their paychecks will drop. They’ll make it up during the busy season, but when someone is used to being exempt, this transition can be painful.

Prohibit overtime. The idea behind this new change is that it will boost employee’s pay by giving them overtime pay that they previously haven’t been eligible for. That’s great for them, but most businesses can’t afford to hand out big overtime checks. You’ll have to determine how much overtime you can afford, which means you’ll most likely have to limit overtime or forbid it all together. Remember that non-exempt employees have to be paid for all hours worked, regardless of whether they had permission to do the work.

Tracking hours. Employees that have been exempt before are used to taking phone calls at night and answering emails on the weekends. Now? All that needs to be reported as hours worked. They can’t volunteer to do this. And, in fact, if you forbid them to do it and they still do, you still legally have to pay them for the overtime. It’s critical that you make clear guidelines and make sure people stick to them. You may wish to consider desktop computers so they can’t work on weekends or turning off email delivery outside business hours.

Telecommuting employees are a special concern. They may be used to doing a bit of work before the kids get up, sending the kids to work and daycare, doing some more work, going to a parent-teacher conference, etc. That is perfectly OK as a non-exempt employee, as long as hours are tracked.

What about part-time exempt employees? The rules make no exception for part-time employees. Even if they only work 20 hours a week, they still have to be paid more than $47,476 to qualify for exemption, which means that they’ll need to track their hours if they earn less than that. So, if you have an employee earning $80,000 a year as a full time, exempt employee, and then she asks to work 50 percent of the time, her salary would be $40,000 and she’d have to track her hours, even doing the exact same type of work.

It’s important not to panic at these changes, but also important to double check that you’re in compliance.


Dave D'Rave (not verified)July 20, 2016 - 10:28am

This is overall a sensible thing, except for the fact that part-time salaried workers are essentially prohibited. It's another example of government types making rules for the real world and not actually having a clue about what is going on out here.

Question: If I serve on a Board of Directors, and make $40k for attending four meetings a year, does that mean that I cannot be paid a salary (or honorarium, or whatever it is called)? Does that mean that I now have to keep track of the hours when I am watching CNBC or reading the report from the Compensation Committee?

Just askin'. . .

Visitor (not verified)July 20, 2016 - 12:17pm

Itsn't it 2080 hours annually (40 hours in a week* 52 weeks) ? The article says "2040" hours annually.

Visitor TAMMY HOBBS (not verified)July 26, 2016 - 7:19am

Is this apply to hourly and salaried associates. Will this be effective for Georgia?