Heads up employers, new overtime rules are coming. Sad!

Important Update: The following article information has been invalidated as of November 21, 2016 due to a lawsuit and judicial ruling in Texas. This ruling suspends the new overtime rules that were scheduled to be effective December 1, 2016. 

New US Labor Department rules may require business to change their payroll and HR practices.


In its continual quest to manipulate the free market for human labor, the Department of Labor has expanded the rules under The Fair Labor Standards Act (FLSA) for employers regarding paying employees for overtime. The DOL has increased the overtime rules exemption for employers effective December 1, 2016. The long awaited rules require employers to pay overtime (hours beyond 40 per week) to all employees making less than $47,476 per year.

How are employers affected?

  • If your company is already paying employees on an hourly basis… no changes.
  • If your company is paying employees a flat salary (exempt) of over $47,476 per year… no changes
  • If your company is paying any employee a flat annual salary of less than $47,476 per year… well you have some changes to make.

Here is the bottom line…If your company is paying a flat salary to anyone making less than $913 per week to “just get the job done”, then you must treat them as hourly employees and therefor track worked hours and pay for overtime (over 40 hours) . The minimum salary level for an individual to remain overtime exempt under the executive, administrative, professional, and computer employees exemptions will be increased from $455 per week to $913 per week.

How to keep your employees overall wage cost the same and still meet the new rules. Do the math.

Employers with exempt employees currently making less than $913 per week will need to estimate the actual TOTAL hours historically worked by the employee and then calculate the hourly wage rate that equates to the same overall compensation.

Converting from Salary to Hourly and keeping compensation the same.

Lets do an example: Employee Armando typically works 55 hours a week and is paid a salary of $885 a week as an exempt employee. This means Armando is currently beneath the new minimum annual salary level needed to qualify for the overtime exemption and now he must be changed to an hourly employee. So what hourly rate keeps the employers annual payroll cost for Armando the same? In other words: What hourly wage is needed to still pay employee Armando $885 a week for the same 55 hours, but at a customized hourly rate for the first 40 hours, and time and a half for the next 10 hours?

Let’s do some math:

  • Armando’s current weekly base salary=$885 or ($885*52 weeks ) =
    $46,000 per year
  • A standard annual regular work year (40 hours per week) hours:
    2080 hours
  • Annual overtime hours worked by Armando: (55-40) = 15 hours per week, or (15*52) =
    780 hours per year.
  • Overtime premium hours * 50% (time and half) hours = 780*50%=
    390 OT premium hours to be compensated
  • Total annual hours, plus OT and OT premium: 2080+780+390=
    3250 hours
  • The equivalent hourly salary for Armando (considering his usual overtime) would be: $46,000/3250=
    $14.15 per hour

Tracking and Recording Hours Worked

In our example, it will be a new experience for Armando and his employer to track and record all of the hours worked. No more just cutting a paycheck and calling it good.

Does this increase the cost to employers? In some cases it will.

In our example above, the employer really has two choices:

  1. Implement a new process to record and process payroll for Armando on an hourly basis. This might be done with a timecard, time clock or even some of the newer tools that operate as a phone app. In any case this will be a new process that will require increased administration and therefore cost.
  2. Increase the employees pay to above the threshold. In Armando’s case, increasing his salary by $1,476 per year eliminates the hassle of tracking employee hours and paying on that basis.

The impact in the jobs market and wages paid to American works of the changes will be seen in time. Will it help or hurt employees and American small business? Only time will tell. In any event it makes sense for any small employer in the USA to get knowledgeable about the new rules, or considering joining a Professional Employer Organization (PEO). Keeping your company on the right side of employment laws and regulations is what they do. – Joining a PEO is just smart business.


image courtesy of Donny Ray Jones at Flickr