How Federal Overtime Changes Will Affect Your Business

clock with red seconds hand area overtime
Join MRA Now

Judge blocks start of new overtime rules

A federal judge in Texas issued a preliminary injunction Tuesday against enforcement of new and costly overtime regulations that were scheduled to take effect December 1.

The new U.S. Department of Labor (DOL) regulations double the salary threshold that triggers automatic overtime pay for non-managerial, full-time, salaried employees for any hours worked beyond a standard 40-hour workweek. Specifically, the regulations would increase the annual income threshold to $47,476 ($913 weekly), up from $23,660 ($455 weekly).

The court action halts enforcement until after the court has completed consideration of the lawsuit against the regulations brought by 21 state attorneys general, including Michigan’s Attorney General Bill Schuette, and more than 50 business organizations. Michigan Retailers Association will continue to monitor the situation and report significant new developments.

What You Can Do Before They Take Effect December 1

On December 1, updated federal regulations regarding employee overtime will have a dramatic effect on businesses in Michigan and across the nation. The changes extend overtime pay to an estimated 4.2 million U.S. workers, more than 100,000 in Michigan, who are currently exempt from overtime. These new U.S. Department of Labor (DOL) regulations double the salary threshold that triggers automatic overtime pay, at a rate not less than one and one-half times their regular rate of pay, for non-managerial, full-time, salaried employees for any hours worked beyond a standard 40-hour workweek.

Here are answers, compiled from multiple sources by Michigan Retailers Association, to a number of common questions about the changes. While Michigan Retailers believes these answers are accurate, they are not legal advice, and businesses should consult legal or accounting professionals to be sure an answer fits their specific situation.

What are the current regulations?
Under the current system, certain workers are eligible for overtime if they work more than 40 hours in a single workweek. Not all employees are eligible for overtime. Many workers are paid a salary and are classified as exempt from overtime pay.

For example, executive, administrative, professional and outside sales employees are deemed exempt if they meet a defined duties test and receive over $23,660 ($455 weekly) in annual salary. In retail, some store managers may be classified as exempt, depending on their specific duties. Workers earning less that $23,660 in salary automatically qualify for overtime pay. As stated previously, salaried executive, administrative and professional employees who are classified as exempt and earn more than $23,660 do not qualify for overtime pay.

What are the new salary thresholds?
Effective December 1, 2016, the new regulations focus on increasing the salary and compensation levels needed for executive, administrative and professional workers to be exempt from overtime. Specifically, the regulations increase the annual income threshold to $47,476 ($913 weekly) beginning December 1, 2016. The duties test remains the same.

Is my business covered by the updated regulations?
Entities that have more than $500,000 in annual sales and/or have employees engaged in interstate commerce (i.e., accepting/processing credit card payments, receiving goods/services from out-of-state vendors, making or receiving interstate phone calls, etc.) must comply with the federal Fair Labor Standards Act (FSLA), including these new overtime provisions.

Who is exempt?
Managerial employees are exempt from overtime if they receive a salary and perform executive, administrative or professional duties critical to the function of the business.
Note: Managers and trained professionals with salaries above the threshold are exempt if they meet certain requirements, such as having supervision of other employees as their primary duties. However, if they spend too much time on non-supervisory duties, such as stocking shelves or helping customers, they can lose exempt status and must be paid overtime.

What about manual laborers?
There is no exemption for manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy, regardless of their compensation.

How do the updated regulations treat bonuses and commissions?
Also starting December 1, up to 10 percent of nondiscretionary bonuses and incentive payments (including commissions) count toward the annual/weekly salary. Nondiscretionary bonuses and incentive payments are forms of compensation promised to employees, for example, to induce them to work more efficiently or to remain with the company. By contrast, discretionary bonuses are those for which the decision to award the bonus and the payment amount is at the employer’s sole discretion and not in accordance with any preannounced standards.

Can an employer say that a Christmas bonus is part of an employee’s salary in an effort to meet the new standard?
An unannounced holiday bonus would qualify as a discretionary bonus, because the bonus is entirely at the discretion of the employer, and therefore could not satisfy any portion of the $913 standard salary level.

If an employee is paid between $822 and $913 per week, can the bonus be paid less frequently than quarterly?
No. To count toward the standard salary level, nondiscretionary bonuses must be paid quarterly or more frequently.

Has there been any change to the exemption for commissioned employees working at a retail establishment?
There is no change, and these employees are exempt as long as at least 50 percent of their gross earnings are from commissions.

How does this affect flex and comp time, especially for seasonal businesses?
The impact on employers in seasonal industries that often require more hours at certain times of the year is significant. The practice of employees who want to work overtime in exchange for future days off or flexible time is not allowed for those eligible for overtime under the new rules.

How do the changes affect highly compensated employees?
In addition, the changes increase the threshold for highly compensated employees, those exempted employees in the 90th percentile of full-time, salaried employees, and will also be updated every three years. The current highly compensated employee level is set at $100,000 and will increase to $134,004 per year in December. The duties test to determine which white-collar employees are exempt was not changed.

How long will the new salary threshold be in effect?
The threshold will automatically increase every three years based on wage growth, with the next update scheduled to occur on January 1, 2020.

Are actions being taken to delay the December 1 effective date?
Business groups and others have filed lawsuits and are lobbying Congress to change the effective date. Federal legislation, S. 2707 in the U.S. Senate and H.R. 4773 in the U.S. House, would stop implementation of the rule by requiring DOL to perform an economic analysis on the impact the new regulations will have on nonprofits, small businesses and employers in vulnerable industry sectors. The House on September 28 passed the Regulatory Relief for Small Businesses, Schools, and Nonprofits Act, which would give employers an extra six months to come into compliance by pushing the deadline to June 1, 2017. The Senate has not acted. The unexpected election of Donald Trump as president could also have an effect on these new regulations in 2017. However, there is no guarantee any of these actions will delay or undo the new regulations. The wise course for businesses is to be ready to follow the new rules on December 1.

What are these changes expected to cost businesses?
DOL estimates that employers will spend $592.7 million to comply with the new rule. Business groups contend the actual cost will be higher. Employers should be planning diligently for the impact on their operations and finances.

What should businesses do before Dec 1?
The federal changes are designed to require employers to either pay employees higher salaries or pay overtime wages. As a business owner, there are several steps you can take to prepare, especially if you are concerned about controlling added costs.

What should I do first?
Start by reviewing all employees’ classification and compensation to see which, if any, employees could fall under the new overtime threshold.

What options do I have?
• Consider reclassifying salaried employees as hourly employees or developing a tracking system for salaried workers to ensure they don’t exceed 40 hours each week.
• Evaluate increasing employee salaries above the salary threshold. Raising salaries might work for businesses that already pay salaries close to the new threshold of $47,476. Businesses with employees who work a lot of overtime might also want to raise salaries. Employers should estimate the number of overtime hours employees work, and calculate the cost. Comparing the cost of overtime pay against the cost of increased salaries can help employers decide how to adjust employee wages.
• On the other hand, if you decide to reduce wages or hours to cut payroll costs, your employees could be upset. You could adjust their responsibilities to match the new pay and schedule in order to save employees from working the same job duties for less pay.
• Train employees, especially supervisors and managers, on timekeeping. Some employees, especially salaried workers, might be unfamiliar with timekeeping systems. You should show all employees how to keep track of hours worked.
• Contact your congressman and U.S. senator and encourage them to support S. 2707 and H.R. 4773 to delay implementation of the new regulations.

What’s the best way to inform my employees of the changes?
The more you keep your employees informed, the easier it will be to transition your company. Explain what will happen when the overtime rule changes and how the salary threshold works. Talk to your employees about how your business will adjust to the new overtime law. Let employees know about any changes to their pay, schedules or job duties. Clarify that you are not making changes randomly, but that you must comply with the law.

Where can I find additional information?
For more information on the new overtime regulations visit: