New rules on overtime pay: how they could affect you

By Joseph Anthony

Changes in the rules regarding overtime pay, which took effect in August 2004, are requiring business owners to re-assess how they pay people and more. The duties you assign, the promotions you give, and even the titles you bestow on employees could factor in your workers' eligibility for overtime pay.

These rule changes, signed into law by the Bush administration, likely will result in businesses paying overtime to more of their lowest-paid workers. At the same time, overtime pay will be eliminated for many middle-class workers.

The new rules generally are favored by pro-business organizations and opposed by groups representing employees. They will have an impact on many small businesses, but it may take months to evaluate their full effect on the business world.

This article seeks to help small-business owners understand the new rules better and make whatever changes are necessary to comply with the new regulations.

Under the Fair Labor Standards Act (FLSA), qualifying employees have long been eligible for overtime pay for any hours worked over 40 hours in a week. The challenge always has been to determine who is covered under this general rule and who is "exempt," or not covered.

The new rules provide more clarity in some areas, and generally make it easier to declare workers as exempt from overtime pay. But there remain significant gray areas, as well as the potential negative side effect of employers "promoting" employees just to deny them overtime pay.

The simpler part of the new rules

Under the new U.S. Department of Labor rules, most people earning less than $23,660 a year automatically qualify for overtime pay. Blue-collar workers such as manual laborers and other employees who engage in repetitive physical tasks are eligible for overtime pay regardless of their salaries.

On the other hand, most people earning $100,000 a year or more who work in an office, or regularly do other non-manual work, are now excluded from being eligible for overtime pay.

Similarly, people earning at least $100,000 annually who regularly perform tasks or duties that qualify them as "exempt" executive, managerial or administrative employees are going to be exempt from overtime protections. There aren't too many highly-paid individuals who will be able to slip through this screen.

These categories are the relative extremes of the new overtime rules, and are the ones that are relatively easiest to understand.

In the middle are people earning more than $23,000 who are paid on the basis of an annual salary rather than an hourly wage rate.

A title can mean a lot

Employees earning $23,660 or more a year ($455 a week) fall into the great overtime gray area. Among the people who don't get any overtime rights protections are employees who work in "bona fide executive, administrative, or professional capacity or in a capacity of outside salesperson."

Now, don't jump to conclusions: The question long has been just who is considered to be a "bona fide" executive, administrator, or professional employee for the purposes of being exempt from overtime protections. With the new regulations, the Labor Department has changed the definitions that are used to determine whether these employees are exempt from overtime pay.

Generally, the new rules appear to be more flexible in allowing employers to refuse overtime pay to people whose salaries are at the $23,660 mark or higher.

For example:

Under the previous rules, professional employees could be exempted from overtime if they had professional degrees. They can still be exempted from overtime under the new rules if they have a professional degree; however, work experience and instruction can be substituted for the professional degree standard and used by an employer to determine that an employee isn't entitled to overtime.
Executive employees used to be required to have the authority to hire and fire workers in order to be exempted from overtime. Now, merely being able to make recommendations about hiring or firing can pull an employee out of the overtime-eligible category. This is true even if the executive doesn't actually hire or fire anyone and isn't authorized to make a hiring or firing decision on his or her own.

Winners and losers under the new rules

Among workers, the 1.3 million or so lowest-income workers who aren't already entitled to receive overtime pay have to be considered potential winners. Better-paid laborers, as well as many white-collar workers, are potential losers.

Among the industries likely to benefit by having many of their employees exempted from overtime rules are insurance companies, restaurants and retailers.

Supervisors in retail stores are now ineligible for overtime protection if they schedule employees, assign work, manage inventory, or perform other management functions. Even in cases where the supervisor performing any of those duties is also doing the same work as his or her subordinates, the supervisor will still be ineligible for overtime protection.

The Labor Department's changes also could result in some unusual tactics by employers.

For example, with the $23,660 figure separating people entitled to overtime from those who aren't guaranteed it, employers might give raises to people who otherwise might not receive them. The reason: Someone getting a base salary of $23,000 might be earning a few thousand dollars a year in overtime. The same employee doing exactly the same work might not qualify for overtime at all if his salary was set at $24,000.

Would raising someone's salary by $700 to avoid paying overtime be a smart way to run your business and treat your employees? Probably not. But the rules appear to allow it, and certainly some businesses pressing to keep labor costs as low as possible will consider it.

The rule changes do not supersede collective bargaining agreements. So employers who have agreed to pay overtime to certain classes of workers are still obligated to do so, regardless of the new Labor Department regulations.

For the Labor Department's own comparison of the old overtime rules and the current ones, visit this Web page: www.dol.gov/esa/regs/compliance/whd/fairpay/side-by-side_PF.htm.