Ready for a 37.5% Increase in Payroll Costs?

Don’t wait until it’s too late…..

Earlier in the year, the U.S. Department of Labor announced an increase in the wage threshold amounts for determining whether an employee is exempt (salaried) or non-exempt (hourly, and thus eligible for overtime. Those new rules are set to take effect on December 1, 2016, and we expect that almost every business in

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the country will be impacted when at least 4.2 million employees will be newly eligible for overtime pay. We’ll actually take a bet that you’re the employer of one of those 4.2 million employees.

Understanding Exempt vs. Non-Exempt

First, it’s really important that you understand the differences between an exempt and a non-exempt employee as the rules currently stand. These rules are covered by the Fair Labor Standards Act (FLSA) and it’s an area where business owners often struggle. If you aren’t familiar with the difference between exempt and non-exempt employees, the DOL has a good explanation here.

Many business owners mistakenly believe they can just put a person on salary because the person always works exactly 40 hours, or the person has an advanced degree, so therefore they qualify. But that isn’t necessarily the case. It’s the job employees have with you that dictates whether they are exempt or non-exempt. For instance, if a lawyer with an advanced degree is working as a paralegal, you might be tempted to call that person exempt, but that’s not correct, because the paralegal job does not qualify for exemption under the regulations. Therefore, the person in that role is non-exempt and is overtime eligible.

In most states, overtime is paid at 1.5 times the base hourly rate and is owed when an employee works more than 40 hours per week in any one workweek (and you should have policy around what constitutes a work week), though this can vary by state.

What’s Changing?

There are actually a couple of changes, but the biggest (and potentially the thorniest for you) is probably the wage threshold. At this point in time, assuming that you’ve met the other exemption requirements (and please do yourself a huge favor and review the link above – not doing so could cost you an arm and a leg), employees can be considered exempt (or salaried) if they are paid $455 per week or just $23,660 annually. The new rules starting on December 1, 2016 will raise this amount to $913 per week, or $47,476 annually. Even if you currently have employees on staff that have positions that are considered exempt or salaried under all other provisions of the regulations, if they are making less than $47,476 annually they can no longer be considered exempt once the new regulations go into effect.

What Does This Mean to You?

If you’re currently employing exempt or salaried employees, and they are making less than $47,476 per year, then as of the date the regulations change, they will be considered non-exempt and therefore eligible for overtime. And, this also applies to those on your staff with commission agreements. Inside Salespeople with a base pay and commission agreement are subject to these new rules.

Right now, in order to be prepared you should be determining:

Who on your staff falls into this category

  • How will this affect your payroll? Who do you have now who falls under the new threshold and from the hours they work currently, how will that increase your payroll numbers?
  • You already know the new annual number is $47,476 but for anyone who earns a non-discretionary income it is more accurately a quarterly minimum of $11,869 – do you need to make quarterly adjustments?
  • What timekeeping measures will you put in place for those that haven’t kept their time before? Because you will have an obligation to track all hours for non-exempt employees.
  • And how will you communicate these changes to your employees to let them know about this change in their payroll status?

Think of it this way. If you currently have an exempt employee who is routinely working 50 hours a week and that employee becomes an hourly employee under this regulation change, you’re looking at an increase in payroll costs once you have to pay overtime of 37.5%. Most small businesses we know simply wouldn’t be able to absorb that level of increase without figuring out the situation now while they have time to do so.

If you’re a smart cookie, this might be time to seize the moment and figure out whether you have your employees classified properly in the first place. Don’t get yourself into a place of liability. We’re here to help.

Call or email us at 913.940.5391 –, and we can help you figure out how to get your ducks in a row well before the deadline. We’re pretty sure you haven’t budgeted for a sizeable payroll increase – you’ve got time to work it all out before it takes effect.