Every time I do a presentation on overtime, I can feel the blood pressure of the audience rise and see all their hands ball up into fists. Overtime is not a happy topic like these. However, it is an incredibly important topic considering that overtime reform that is making headway in Washington. While it is easy to hate it or love it, this post is going to give you the key info you need to know AND some pros and cons. Without further ado, I bring you OVERTIME REFORM 101!
First, a review.
Overtime is the extra paycheck you get when you work more than 40 hours in a workweek. If you are not otherwise exempt from overtime, you will receive time and one-half your regular rate of pay per hour over 40. A workweek is a 7-day period defined by the employer (hint: unless you are a government agency, there is no such thing as "comp time"). "Time and a half" is based on an employee's regular rate of pay. This is a fairly easy calculation if the employee is hourly. Not so much if the employee is salaried.
Speaking of which, hourly employees are usually non-exempt -- meaning they are eligible to earn overtime. Salaried employees are NOT automatically exempt from overtime as many people believe. A salaried worker my be eligible for overtime if they fit into one of the so-called "white collar exemptions," which are the subject of a LOT of court (and people) confusion and the subject of the overtime reform taking place today.
The "White Collar Exemptions"
In order to fit into an exemption, the employee must first meet a salary threshold. Currently, the threshold is $455 per week or about $23,660 per year. If the employee is under this amount, they will most definitely be eligible for overtime. If they meet this threshold, they may be exempt if they also fit one of the "White Collar Exemptions." In reality, there are over 20 such exemptions but there are 3 categories most used: Administrative, Executive, and Professional.
What is the Administrative Exemption? No one really knows. Just kidding, but not really. This exemption is looking for an employee that meets or exceeds the salary threshold (see above) AND primarily performs office or non-manual work directly related to management and general business operations and whose position includes the exercise of "discretion and independent judgment" with respect to "significant" matters. Courts look at this on a case-by-case basis and are all over the map with what it means and what jobs may be included.
What is the Executive Exemption? We kind of know what this one means but its still subject to a lot of interpretation. This exemption is looking for an employee that meets or exceeds the salary threshold (see above) AND (1) has a primary duty of managing the company or a recognized department // subdivision; (2) regularly directs the work of 2 or more employees; and (3) has authority to hire and fire employees, give promotions, and in general, change the status of an employee. Courts seem to focus a lot on finding the *PRIMARY* duty. If you are a boss who routinely does things like operate a cash register or stock grocery shelves, you may not actually fit the exemption.
What is the Professional Exemption? Alas! One that mostly makes sense. Here you are looking for an employee who meets the salary threshold (see above) and has official letters after their name. Think: PhD, MD, JD, CPA, MS, DDS, DVM, etc... (Its a bit more complicated than the letters, but this is a good start).
So why reform such a confusing system? The obvious reason is that the exemption categories are extremely confusing, subject to a lot of different court interpretations, and generally impossible for an employer to apply with any level of certainty. The less obvious reason is the salary threshold, which has not been revised since 2004 and is lower than the national poverty level for a family of four. (Prior to 2004, the last revision to the salary threshold took place in 1975). In other words, its outdated and a problem.
On June 30, a Notice of Proposed Rule Making was issued that suggested a new salary threshold while keeping the white collar exemptions largely the same. This proposed threshold was based on over a year of research in which the White House determined a new salary threshold equal to $970/week or $50,440/year would keep up with the times, the average salaries of working class Americans, and inflation. A 60-day comment period followed and ended on September 4th. As you can imagine, people (both employees and employers) had a lot to say. Here is an example.
The revised salary threshold will make a lot more people eligible for overtime- particularly a lot more salaried people. For those of you currently making less than $50K and routinely working more than 40 hours in a workweek, this is a HUGE income burst. The theory is that hard working people should be compensated adequately. By allowing more people to earn overtime, more people will be "compensated adequately" and/or (in the alternative), employers will be forced to dial back some of those late nights and early mornings.
Another pro: the new threshold better reflects real life for most Americans. It may be a 100% increase but its still only the 40th percentile of earnings of full-time salaried employees in the United States. Remember that the current salary threshold is below the poverty line.
Holy increase, Batman! For employers, this is not a good scenario. For companies who rely on those additional hours to get work done, the number of employees owed overtime just increased exponentially which means corporate profits just took a hit based on the increased payroll. Many opponents of overtime reform argue that employers will be forced to undergo mass layoffs which will leave many people unemployed and back to square one. Another side of the opposition argues that we are focusing on the wrong thing and its really the definitions of the exemptions that are problematic.
With 2016 lurking just around the corner, companies need to go ahead and prepare for overtime changes. It seems that most people in Washington agree that overtime needs a makeover, the question is how much and to which part(s). Of course, there is always a way around the overtime debacle: keep your workers under 40 hours in a workweek. I know, I know... it may be easier said than done but hiring a few extra bodies on deck, even if they are part-time, may save you the headache of overtime altogether.
Overtime is kind of a big deal and really confusing. If you would like a free (yes, I said FREE) 45 minute seminar on overtime, let us know or fill out the form below: