Workers in the United States have long been known for their hard and dedicated work ethic. Compared to the rest of the developed world, employees in the United States work significantly more than their peers. One study found that U.S. workers put in around 70 more hours per year than their peers in Japan and an incredible 350 more hours than similar workers in Europe. While this is partly due to the lack of U.S. legislation to regulate a mandatory number of paid vacation days per year, overtime hours also play an important part in increased labor costs for U.S.-based companies.
For many companies, labor costs can represent more than half of total business costs. In our competitive, globalized economy, managing these labor costs is certainly an essential task of every successful business. The U.S. Bureau of Labor and Statistics found that in 2013 fulltime workers averaged 42.5 hours per week, which meant that tens of thousands of employers around the country paid overtime wages to their workforce. While overtime pay might certainly be necessary to help businesses achieve certain goals during crucial moments throughout the year, regular overtime pay of “time and a half” can put economic stress on finance departments.
Starting on January 1st, 2020, new overtime pay rules which were recently passed by the U.S. Labor Department will go into effect. Below, we offer a complete guide to how companies can comply with the new overtime rules while staying financially afloat.
What do the New Overtime Rules Stipulate?
In a nutshell, the new overtime rules raise the threshold under which employees must be paid overtime to $35,568, or $684 per week. The previous threshold was considerably lower at just $455 per week, or $23,660 per year. According to the Department of Labor, the new overtime rules will directly affect around 1.3 million workers who will now become eligible for overtime pay. Furthermore, the DOL estimates that workers will collectively receive $298.8 million extra pay each year due to these overtime rule changes.
As with the prior DOL overtime rule, there are several exceptions to paying overtime, including:
- Salaried employees who receive a fixed salary that is not subject to reduction do to variations in the quality or quantity of work performed;
- Employees who receive a specified weekly salary which is at least $684 per week ($35,568 annually for a full-year worker);
- Employees whose main work is executive, administrative, or professional in nature. These types of jobs tasks are defined in the DOL “duties test” which you can see here.
- Lastly, highly compensated employees (HCEs) are also generally exempt from overtime pay. With the new overtime laws, this upper threshold has been raised to $107,432.
Strategies for Compliance
As with any federally regulated, overarching change in employee compensation, there will certainly be challenges for compliance faced by businesses around the country. Employers would do well to evaluate their systems for several payroll items, including bonuses, overtime tracking, and daily time-keeping of time worked. Fortunately, there are several financial maneuvers and tactics that can allow companies to maintain compliance with the new laws while still maintaining their payroll costs at a manageable level for financial success.
- Firstly, it is important to know that nondiscretionary bonuses and incentive payments can be used to satisfy upwards of 10% of new salary level requirements. These incentive payments can include commissions, which gives businesses alternative ways of calculating total employee pay and to determine which employees fall within the new salary range.
- Secondly, HR departments can also put into place procedures to limit overtime hours by those newly exempt workers, at least until the company is in a financial position to gradually increase more overtime hours. This can include requiring employees to record lunch hours and breaks. Certain employee tracking software can be configured to alert HR departments when certain employees are approaching overtime levels and make changes based on this set of data.
- Lastly, as HR departments come up with a smooth transition plan for the new DOL overtime rules, the following tools and resources can assist in making sure that your company is not at risk of committing labor violations:
- This toolkit from the Society for Human Resource Management (SHRM) will help you determine overtime eligibility for each employee in your workforce.
- This impact analysis guide and calculator is essential for HR Departments looking to understand and analyze the financial implications of the new overtime rules.
- Lastly, this virtual seminar is a great resource for human resource professionals who want to make sure they understand and comply with the Fair Labor Standards Act.
The Challenge with Tracking Employee Work Time
Companies, and their HR departments specifically, will have to dedicate special effort to tracking the affected workers’ work time. As mentioned above, the new DOL law will require businesses to pay overtime premiums for all hours worked beyond 40 in a given workweek for employees who qualify given the specific salary considerations. In many cases, however, companies and their HR departments might not have efficient tracking systems in place.
If your company has not used advanced time tracking software, now might be the time to do so in order to make sure that you comply with the new DOL policies on overtime pay. Noncompliance with the new overtime pay rules could lead to expensive back pay that could cause economic stress, liquidated damages, statutory penalties, and even the cost of the attorney fees of aggrieved employees.
Furthermore, because certain employees will now have extra economic incentive to log more than 40 hours per week, companies could potentially see an increase in employee time fraud, such as buddy-punching practices in order to increase their income. Buddy punching, to name just one type of employee fraud, is thought to cost U.S. employers upwards of $373 million each year.
For workplaces that continue to rely on outdated employee attendance tracking systems such as time clocks, investing in state of the art time and attendance software might make sense on several fronts. For starters, your company will be better prepared to accurately log and record employee work time to ensure that you comply with all relevant labor laws. Furthermore, advanced time and attendance software such as biometric time clocks will use employee-specific information (such as fingerprints) to minimize, if not completely erase, the risk of employee time fraud.