Overtime Pay: Exempt Vs. Non-Exempt
*This blog is adapted from the second episode of HR Party of One, Overtime Pay: Exempt Vs. Non-Exempt, which you can view below.
You probably already heard that the Department of Labor released a final rule last year that increased the overtime wage threshold, and many organizations are going to face some changes related to that new rule.
The Five Stages of Overtime Grief
Sometimes when new hires join our team at BerniePortal, they’ve spent their entire career managing email in Outlook. We use Gmail. On their first day, we go over our approach to managing email…which doesn’t include folders. You can see confusion, frustration, and sometimes even terror in their eyes.
Change is hard… and compensation is perhaps the most sensitive of all HR subjects. When the Department of Labor creates new rules, some HR Parties of One might even spend some time in a period of mourning…something we call the Five Stages of Overtime Grief.
You might not be excited to make these changes. It might feel uncomfortable. But growth and comfort don’t coexist, and with the right approach these changes can actually benefit your organization in the long run. For the record, most of our new hires end up preferring Gmail after a few weeks or months of adjustment.
New Overtime Law
This new rule - which is now in effect as of January 1 - means that employees making up to $35,568 per year are now eligible for overtime. On a weekly basis, employees making up to $684 per week are eligible for overtime.
This increase shouldn’t have been a huge surprise – raising the overtime threshold has been in the works for a while. In fact, the old limit of $23,660 hadn’t increased since 2004. The Obama administration tried to bump that up to $47,478, which would have taken place in 2016, but a federal court ruling blocked that increase.
Even so, an increase of some kind was pretty much inevitable, and this new limit of $35,000 is sort of a “middle ground” between the Bush administration’s $23,000 and Obama’s proposed $47,000.
The immediate takeaway for HR teams and business owners is that you’re going to have to start paying these newly-eligible employees overtime if they clock more than 40 hours per week.
But beyond that, the new rule gives your organization an opportunity to review your employee classifications more broadly. It’s possible that the way you’re classifying employees today isn’t actually the best practice for your team or the health of your business.
We’ll get into what I mean by that, and how you might think about required changes - in a little bit - but quickly, let’s look at the historical background of overtime pay. How did we end up paying time-and-a-half for hours over 40?
The History of Overtime Pay
Where did that 40-hour number come from, anyway? The 40-hour workweek wasn’t standard until the early-to-mid-20th Century. Prior to that, many workers, especially laborers, worked 12 - 16 hour days.
In 1869, President Ulysses S. Grant created the eight-hour workday for federal workers, but it took much longer for this standard to reach the private sector.
Throughout the early 20th century, other industries came to adopt a standardized working week including railroad workers, manufacturers, printing companies, and others.
Following the depression, in 1938, Congress passed the Fair Labor Standards Act, which created the first minimum wage of 25 cents per hour, and a 44-hour workweek, which was revised two years later to a 40 hour workweek.
The Fair Labor Standards Act of 1938 guaranteed time-and-a-half pay for all hours over 40 - and there were two goals behind this. First, it was intended to discourage employers from overworking employees, by requiring them to pay those overtime wages. Second, the idea was that they’d boost employment. They wanted to create more, and better, jobs for Americans coming out of the Depression.
The Fair Labor Standards Act was primarily focused on “blue collar” jobs, and included a lot of exemptions. For example, salaried employees who do non-manual labor, meaning management and administrative duties, are not eligible for overtime.
In 2004, the Department of Labor introduced something called the “FairPay initiative”, which added working managers and supervisors to the list of “exempt” workers, or workers not eligible for overtime, by classifying them as “executives.” This was the most recent change until this year’s threshold increase, and it caused a little bit of disruption, as it meant thousands of workers were suddenly not eligible for time-and-a-half-pay.
It also brings us to two important terms when it comes to overtime - exempt and non-exempt. And full disclosure, I still have to think about this every time I write an email. Which is embarrassing because it’s not that complicated.
Exempt Vs. Non-Exempt
Exempt employees are exempt from overtime regulations.
Non-exempt employees are eligible for overtime payments.
To remember this, I think of Warren Buffett wearing a Malcolm X hat. You know, the one with the X on it? Warren Buffett is clearly making a lot of money. So he’s X-empt...
So back to the new overtime threshold. Now, any employee making less than $35,000 is automatically non-exempt, or eligible for overtime pay. But the new threshold is an excellent opportunity to review how you classify employees in general.
It may be that some of your employees who are above that salary threshold should also be classified as non-exempt and eligible for overtime.
Many small employers classify almost all employees as exempt. This is generally because its administratively easier, not because it’s necessarily right or the best way to structure their organization.
In fact, many business owners might be surprised to learn that most roles, including sales or customer service, should be classified as non-exempt, hourly positions regardless of how high the compensation level is for the role. In other words, even an inside sales role with a target compensation of $85,000 is generally supposed to be classified as a non-exempt, hourly position eligible for overtime.
Our Experiences with Overtime Pay
We went through this at our organization. Back in 2016, when the overtime threshold was set to increase to $47,000 in December, our organization made some substantial changes.
We weren’t excited about this by any means - we were as frustrated as anyone and resented having to restructure our organization after a decade of what we thought was working well.
That’s actually when we initially came up with the 5 stages of overtime grief:
Stage 1: Denial – Small business owners think, “This couldn’t possibly apply to me. How will I comply with these regulations and still remain profitable?”
Stage 2: Anger – “I’m doing my absolute best for my employees right now and everyone is happy. Why is this happening?"
Stage 3: Bargaining – “I’m sure we can work this out somehow. Maybe I can give pay hikes to put workers above the threshold, rather than reclassifying the workers to hourly.”
Stage 4: Depression – “I’ve analyzed costs and don’t think we can manage. But, if we don’t comply, the penalties are steep. Not only that, how do I maintain a positive company culture when compensation and benefits are bound to be affected?”
Stage 5: Acceptance – “We can do this, but we’re going to have to do it together."
Eventually, we made it stage 5 - and through the process, we learned that our organization had a lot of room to improve. Even though the Obama-era rule wasn't finalized, we kept the changes we made.
Your organization might be in a similar situation. To come to terms with the new rules and begin proactively making decisions, businesses need to be systematic about their approach.
Stay Compliant with Overtime Law
Take an honest look at the salaries of your employees and evaluate the actual amount of hours each employee is working week-to-week. By getting a read on the current state of work and overtime hours, proper decisions can be made on how to adopt the new rules.
If you have employees affected by this and you haven’t done anything yet, don’t panic. Well, maybe panic a little bit. You need to be compliant today. But instead of freaking out, take action today. A good first step is to make sure you have a reliable tool to track time and attendance. It doesn’t need to be a punch card. There are lots of online tools available that are designed to track time and attendance.
BerniePortal, for example, has a time and attendance tracking feature which allows you to digitally track your employees' hours to reduce the possibility of error and increase accuracy in timesheets. It features online and mobile tracking, streamlined time edits, and detailed reporting. You can check it out here.
So if you don’t already have a reliable time and attendance system in place to track employee hours, make sure you get one. Avoid just having employees clock their hours in a spreadsheet - this gets too easy to become inaccurate. The idea here is to get a good system in place that removes ambiguity around when employees are working and when they aren’t. This will also remove resentment among team members who are more honest about their time tracking and those who perhaps aren’t, as well as issues like time theft.
Make Compensation Adjustments Now
Don’t hesitate on tough decisions. Once you’ve analyzed workers’ pay and time statistics, make a call as soon as possible on which compliance method to take for each employee. Business owners can choose to increase salaries to meet the minimum threshold, pay overtime to those now eligible to receive the pay rate, eliminate overtime altogether in the company, or make a reduction in base salary to afford the overtime changes.
Outline Enforcement Rules
A good deal of resistance to the new regulations stems from the enforcement concerns associated with overtime standards. In order to stay within the boundaries, set up specific protocols for employees working overtime, such as whether it is allowed or not, who is limited to core hours, etc. While these changes may be tough, the legal issues that could arise from lack of adoption could be more damaging to a small business.
Communicate with Your Staff
Wherever there’s confusion, there’s usually a lack of communication. Once you’ve analyzed your numbers and figured out how you’re going to comply as a company, hold a meeting with your employees to communicate a) what the new regulations mean for your business, b) how you’re going to comply with the regulations as an organization, and c) how the new policies will affect employees on an individual basis.
Provide clarity wherever you can, encourage questions, and reassure your employees that you’re committed to them as individuals and to upholding the company culture you’ve worked to foster prior to the new regulations.
The Benefits of Moving Staff From Exempt to Non-Exempt
This might initially feel like a hard sell - but non-exempt team members have the ability to manage their own hours and earn more money in high-demand periods.
Our business has a lot of seasonality. During the busy time of year, our customers need some of our people to work more than 40 hours per week.
Obviously, it's better for our team members to get paid overtime when that happens, which they wouldn't get if they were exempt. It's also better for our managers, given that their teams are a lot happier during these critical times of year because they're making more money. For example, people are less likely to quit before the busy season if they see it as a time when they're going to make a lot of extra money versus it just being a time when they're working a lot more with no immediate financial return.
This dynamic makes it easier for managers to plan and staff appropriately for our busiest time of year.
While the idea of a change might be daunting - it can actually create across the board wins for your team and your business.
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