How small businesses can prepare for 2020’s new overtime rule
The new decade is kicking off with one of the biggest workplace changes in years — and it will impact both small and large businesses across the country. Starting January 1, 2020, more than a million American workers will be eligible to earn overtime pay because of a new Department of Labor rule and companies need to reevaluate their HR practices to be prepared.
This is the first time in 15 years the federal minimum salary threshold for overtime has increased. Under the Fair Labor Standards Act (FLSA), the pay threshold for exempt workers will go from its current level of $23,660 per year to $35,568 per year.
Companies and employees may focus on the negative impacts first. Business owners may worry these changes could be costly, requiring new technology and increasing wages. While employees may fear they won’t earn as much if their status changes.
But reclassifying an employee from “exempt,” or not overtime eligible, to “non-exempt,” can be tricky for certain employers. For example, some small businesses may not have a system to track hours if their employees were previously paid a fixed amount every month. While large companies will have to update their policies and train their managers.
At a time when workplace expectations are under a microscope, the change is meant to compensate workers for the hours they work and hold companies accountable. Amazon employees, for example, have spoken about mandatory 60-hour weeks. And more recently, some employees at the luggage company Away told the Verge that they worked long hours, sometimes without receiving overtime pay.
Research cautions against working excessive overtime, as shorter work weeks have shown to increase productivity. If a million Americans now must be paid for overtime, it may incentivize companies to prioritize work-life balance and shorter hours.
Erron Stark, division vice president of channel strategy at ADP, said regardless of the possible negative impacts, both sides can benefit from these changes. “The more productive [employees] become, hopefully, the more profitable the organization will be long-term,” he said.
Business Insider spoke with Stark and Margaret Ferrero, vice president and assistant general counsel at ADP, one of the largest human capital management (HCM) systems in the US. Stark and Ferrero have more than 10 years of experience helping businesses with HR and payroll. They explained how the overtime rule could impact businesses and how they can prepare before the new threshold takes effect.
Get an advisor to evaluate the financial impact
While the new rule could complicate company budgets, hiring processes, and team structures, Stark encouraged companies and employees not to assume the worst. “The difference between that amount versus what they were previously making may not be as substantial as they may think,” he said.
He advises business owners first seek counsel from a consultant, accountant, or advisor to evaluate the financial impact. Bringing in an expert can help businesses implement the right workforce management and HR solutions for their needs.
“The majority of the small business community does not have an HR professional or SHRM-certified individual working for their organization,” Stark said.
And of course, your state’s laws may differ from the federal ruling, so be sure to stay up to date on both state and national requirements.
Deciding whether to track hours or increase salaries
Once you understand the regulatory and operational needs of your company, Ferrero said it helps to think of reclassification in terms of productivity, which will ultimately benefit both the employee and employer.
Look at the number of hours your employees typically work. If you increase an employee’s salary to meet the threshold, consider whether they are performing the duties that fall within that bracket. If you move an employee to overtime eligible, consider whether the quality or quantity of their work is directly related to the number of hours they work. Is their overall success impacted by working more than 40 hours a week?
These factors can come down to the minute details, such as whether your company provides cell phones and laptops to your employees, Ferrero said. Non-exempt employees could accrue more overtime given the option to work from home or after regular hours — something you don’t have to weigh as heavily when employees are exempt.
Understanding the impact of these changes on your employees
“Employers would be remiss in only focusing on the financial aspects, they certainly need to make sure they’re focusing on the human aspect of it as well,” Ferrero said.
One emotional impact to consider is that employees who go from an exempt status to non-exempt, could view the change as a demotion. “They fail to really look at the full scope of what it means to be non-exempt,” Ferrero said.
But Stark said the change could empower employees to understand the value of the work they contribute, especially if they work more than a typical 40-hour workweek.
“You have the opportunity to be paid for every minute, every hour that you work, rather than being paid a salary and working as much as you need to in order to get the job done,” Ferrero said.
Employees moved to non-exempt could have more autonomy in setting their hours and achieving a work-life balance. “They have more control over their work time,” said Ferrero.
Reporting hours also means employers will see how much employees are working, so if a company’s culture promotes well-being and balance, they can ensure employees aren’t being overworked.
That empowerment and visibility could improve employees’ connection to the company, Stark said, which could lead to higher job retention. “Hopefully, it deepens a relationship where they stay longer within an organization,” Stark said.
Training and communicating new policies across teams
Finally, it’s key to educate employees on what to expect. “All employers should do regular training on the Fair Labor Standards Act and what it means to managers and what managers responsibilities are around working with their non-exempt employees,” Ferrero said.
Stark said training employees on new technology and protocol is equally important as communicating how the changes impact them, especially in terms of compensation.
“You need to encourage your employees to really think about how they’re working,” Ferrero said.