Anytime you deal with Department of Labor (DOL) regulations you can be assured of facing an overwhelmingly complex set of rules.  The new overtime rules effective December 1, 2016 are no exception, but there are some very basic things that all small and even micro-businesses should understand.

This is a complex topic, so I’m going to provide a list of must-knows up front so you can decide if you want to read further for more information. I want my micro-business readers to take away that:

1)  You are likely required to follow the overtime rules from the department of labor.

2) Determining an employee is exempt from overtime is far more complicated than simply paying them a salary.

3) Any employee with a salary less than $47,476 (starting December 1, 2016) must be paid overtime.

4) It’s very important to pay overtime when it is required.  An employee cannot “opt out” of overtime.

5) One disgruntled employee with a claim for unpaid overtime can trigger a DOL audit, so be careful to comply with the rules.

Now for the details . . .

Don’t assume you are exempt just because your gross revenue is less than $500,000.  While it’s true companies with sales greater than $500,000 are certainly governed by the DOL rules, most smaller companies are as well.  This is because any size company that is engaged in interstate business is subject to the rules.  It is extremely difficult to not be engaged in interstate business in today’s digital age. Is your web designer or hosting company located in a different state? Is your credit card processor located in another state? Any of these kind of transactions can be used by DOL to assert the business is subject to the new overtime regulations.  My advice for micro-businesses is to assume that they are subject to the DOL rules.

Today’s focus is on how employees are classified as either “Exempt” or “Nonexempt” under the new rules.  Exempt employees do not have to receive overtime pay whereas Nonexempt employees must be compensated time-and-a-half for any hours over 40 per week. What constitutes a work-week can be determined by the employer, but must be applied consistently for all employees and time periods.  Nonexempt employees cannot “opt out” of overtime. In other words, they cannot agree to not receive time and a half.  Also, hours cannot be shifted from one week to the next in order to avoid overtime.  If an Nonexempt employee works 45 hours in one week and 35 hours the next week, they must be paid time and a half for the 5 hours of overtime in week one.

Some people like to use the phrase “salaried employee” interchangeably with Exempt Employee , but this can cause great confusion. While all Exempt Employees must be salaried (with very few exceptions), not all salaried employees are exempt. To be exempt an employee usually must meet two tests:

First, the employee must not be a “blue collar” worker, but rather involved in executive, administrative, professional services, outside sales, or computers.  This classification is not nearly as straight forward as it might seem.  For example, employees strictly providing secretarial-type services and not involved in administrative decision making are NOT considered administrative and thus cannot be exempt.

Second, the employee must be paid a weekly salary of at least $913 per week ($47,476 annually) to be exempt from overtime.  So, an otherwise Exempt Employee being paid a $45,000 annual salary must be compensated for overtime at a rate of $32.45 per hour ($45,000 / 2,080 hours X 150%).  If the employee works considerable overtime, it may be cheaper to increase their salary to $48,000 thus making them exempt (if they meet the first requirement).

If there is any question as to whether a salaried employee might be non-exempt (and thus qualified for overtime) it is vital the employer keep a record of the time worked by this employee.  This might be very distasteful to the salaried worker, but is vital for the employer’s protection.  In the case of a DOL audit where the employer doesn’t have sufficient time records, the DOL will likely believe whatever the employee tells them they worked.  It seems unfair, but the employer has an obligation to have a record of actual time worked.

Wow, this is complicated and we’re barely scratching the surface!

This post has probably generated more questions than answer.  Please email me with your questions and I’ll try to post additional blogs on this topic with more explanations.  This is a huge topic, so it may take a while to cover everything!

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