And it’s not just agencies. It’s estimated that the preparation and management to stay compliance with this new law will cost US businesses $592.7 million and over there will be a $1.4 billion net transfer to employees.
The 4As estimate that 25% of agency employees will now be eligible for overtime pay for every hour over 40 that they work. At AMI, we believe it’s closer to 40%, given that the agencies we work with are smaller (1-300 employees) and privately held.
This is a complicated issue and there are no easy answers. As an agency owner, you’ve got to use the the time you have between now and December 1st to prepare for this huge change.
Today, if an employee makes less than $23,660 and works over 40 hours, they are eligible for overtime pay.
As of December 1st, the new salary threshold goes up to $47,476. Any employee who is not a manager/supervisor will now need to be paid overtime for anything over 40 hours. The $47,476 will increase every 3 years, so know this is going to be an ongoing problem for agencies.
Given the way we work today, you can see how this is quickly going to be a problem. Your employees don’t work traditional work weeks or hours. Think about the time they spend in client meetings or traveling with clients at trade shows or other events. How about the time they spend traveling on behalf of the client. Even the plane time, if they’re working, need to be counted against the 40 hour threshold.
As if that’s not bad enough, any email, calls, or texts from clients after hours also needs to be counted.
One bright spot — 10% of the minimum salary can be non-discretionary bonuses and commissions.
I know what you’re thinking — are any of my employees exempt from this? The answer is yes, but it’s a very specific yes.
To be considered an exempt employee, They must meet all three criteria.
- How is the employee paid (they must be salaried)
- How much does the employee earn (Over the 47,476 threshold)
- What duties does the employee perform? (The duties test)
So what is the duties test? Again, they must meet all three of these criteria. (My guess is that if you have an employee who does, they’re already over the threshold.)
- Regularly supervises two or more other employees
- Has management as the primary duty of the position
- Has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments)
So what should you be doing now, to prepare for the new Department of Labor overtime law?
The biggest challenge to most agencies is that you’ve been sloppy on your time sheets/time tracking. That needs to stop now. The law clearly states that it is the employer’s obligation to accurately track every employees’ time and if you don’t, you are liable.
It’s also predicted that overtime related lawsuits are going to increase by about 20-25% when this goes into play, so you want to protect yourself and be able to defend yourself, if you find yourself in that situation.
The Department of Labor can drop in at any time to audit your time tracking and they say they’re going to be doing much more of it once the new law goes into effect. No doubt there will be some hefty fines if you don’t have your time tracking in order.
Beyond that — you’re going to want to take this time to review your salaries and workloads. You need to decide how you’re going to handle this new $47,476 threshold for each and every employee who falls under it. Gather the historical data you need now, so you know what you’re going to do before December 1st.
Once you know who on your team will be eligible for overtime come December 1st, you have decisions to make. Here are some of your options.
Give them a raise to get over the threshold — If that employee routinely works more than 40 hours a week, maybe it would be cheaper just to raise their salary above the $47,476 threshold.
Job elimination/redistributed — if you have employees who fall below the threshold but almost always work more than 40 hours a week, you may have to eliminate the position all together or re-tool it so the work is distributed among more or different employees.
Outsource/freelance — some of the work you’re paying your entry level employees now may simply not be worth either a big salary increase or overtime. Shifting that work to a freelancer or contract labor may be more financially feasible.
Leave their salary as is and pay overtime as needed — it may be that when you run the numbers, it’s better not to increase an employee’s salary but instead just bite the bullet when they work the OT.
Reduce base pay to cover overtime — this is a controversial one but a viable option. I think you need to think long and hard about it, because it may impact employee morale. You can run the numbers and see how many hours on average your employee is working past the 40 hour work week. Then, you can reduce their salary so that the new (lower) salary and the new overtime adds up to their current salary. In other words, you’re paying them exactly what you’re paying them now for the same number of hours. But to them it may feel like a demotion because their base salary is being reduced (which would also affect their retirement contributions, etc.).
No matter which of these options you choose, odds are — it’s going to cost you some money. Don’t forget to also think about how you’re going to recoup this additional expense. Will you cut expenses somewhere else? Will you raise the cost of doing business with you? If you don’t have a solid strategy, then my fear is that the only place you’ll have to rob from to cover this new expense is your profits.