What’s at Stake in Proposed Overtime Regulations

Changes to overtime rules remain in limbo, but could potentially impact small-business owners.

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About a week before the Department of Labor's (DOL) new overtime law was to go into effect on December 1, 2016, a federal judge in the Eastern District of Texas entered a preliminary injunction that prevented the DOL from implementing the rule. 

The long-awaited update aims to extend overtime pay protections to 4.2 million workers and focuses primarily on the salary and compensation requirements for executive, administrative, and professional white-collar workers to be exempt. The proposed law also establishes a mechanism for automatically updating these requirements every three years. 

Now it's a bit of a waiting game for many business owners, as the DOL has filed an appeal to the injunction and the case lingers in court. Moreover, it's still unclear what, if anything, President Trump will do with regard to the proposal.

Depending on the final resolution, it's possible that employers may never need to implement the overtime rule. But many experts agree that it's wise for business owners to understand how the regulation could potentially impact their operations. 

A case for classification

The new rule, if enacted, would increase the white-collar exemption salary from $455 to $913 per week (or $47,476 per year), and entitle salaried workers to overtime pay if they earn less than the salary threshold. 

In the short term, the new rule would most likely increase costs for certain small business, particularly those in retail, inside sales, and nonprofits. However, if you own an engineering firm, for example, and most of your employees are professional engineers who earn an annual salary more than $47,476, the regulation is not likely to have much of an impact on the way you do business. 

"While that's the nuts and bolts of the law, this is also an opportunity for employers to decide if they need to change the salary for some of their positions and determine which positions should and shouldn't be classified as exempt," says Michael D. Ray, an attorney/shareholder with Ogletree, Deakins, Nash, Smoak & Stewart in Charlotte, North Carolina, who represents employers on a variety of labor and employment matters. 

In some cases, business owners may have incorrectly classified an employee as exempt, or perhaps job duties have changed over time and the position needs to be reevaluated and its description updated — including compensation — to ensure it's classified correctly, says Ray. 

For business owners who may be impacted, there are numerous options — including making employees non-exempt and paying them overtime. Other options include hiring more employees to help keep all workers under 40 work hours per week, or raising wages to move employees into the exempt category. 

"There are a lot of potential decisions facing small-business owners that could affect their business model and bottom line," says Ray. 

"Businesses like to plan things out in advance, and part of this process is knowing what your labor costs will be." — Michael D. Ray, attorney/shareholder with Ogletree, Deakins, Nash, Smoak & Stewart

Employee relations

In addition to the financial impact, Ray says the overtime regulations could also have an effect on employee relations. It can be a sensitive and challenging situation for a business owner to reclassify employees, especially if it means moving someone from being paid on salary to being paid hourly. 

"Some people take real pride in being a salaried employee — it's a big part of their identity and self-worth," says Ray. "It affects everything from how they dress at work to where they sit in the lunch room. Reclassifying an employee can change the way a worker looks at a company and his place within it." 

It's also crucial that reclassified employees and the workers who manage them are educated about the process, particularly when it comes to tracking hours and payment. "Making sure everyone is properly trained will help avoid disputes and ensure everything is in compliance with the law," says Ray. 

Long-term impacts

Because the proposed overtime rule also calls for automatically updating salary and compensation levels every three years, it's important for business owners to consider the regulation's long-term impact. An employer would not only have to pay an employee the new salary amount, but also look at how much this amount would increase in the years ahead. Last summer when the DOL announced its new overtime regulations, the organization estimated that the next salary update would be $51,168 in 2020, an increase of about 7.8 percent from the initial threshold.   

"Businesses like to plan things out in advance, and part of this process is knowing what your labor costs will be," Ray says. "If those numbers are fuzzy or there are going to be drastic changes, that can have a real impact."  

Sam Boykin is a Senior Editor for Conversations.

Image by iStock

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Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a legal or tax advisor. Please consult your tax or legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

Michael D. Ray is an attorney with Ogletree, Deakins, Nash, Smoak & Stewart in Charlotte, North Carolina and is not associated with Wells Fargo & Co. 

This information is provided for educational and illustrative purposes only.

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