Did you know that for most small businesses as much as 30% of gross revenue goes to employee wage and compensation? And labor costs are constantly on the rise. Between this and the increased regulatory burden brought on by The Affordable Care Act, it’s a wonder that small businesses are not merely hanging on, but thriving in today’s economy. That being said, the number one cost for most businesses is labor and for many business owners there can be a great deal of uncertainty around whether or not they have to pay salaried employees overtime.


Many businesses are turning to automation and outsourcing to fight increased labor costs, but small businesses typically don’t have that luxury. On top of all that, pending changes to the Fair Labor Standards Act make it even more difficult for small business owners to understand how to manage their labor force and decide between salary or hourly, exempt or nonexempt, and regular employee or 1099. Luckily some simply cost benefit analysis can help light the way.


U.S. and State Labor Laws

Many of you know that the U.S. Department of Labor is the governing body for labor laws at the federal level. Established in 1884, the original intent of this department was to gather economic information. It wasn’t until over 50 years later, in 1938, when The Fair Labor and Standards Act (FLSA) of 1938 was enacted. The FLSA:


  • Defined the forty-hour work week
  • Created a minimum wage
  • Defined and described the meaning of overtime pay
  • Detailed new child labor laws
  • Determined the difference between exempt and non exempt employee definitions


Fast forward to 2016 where then President Obama and Secretary of Labor, Thomas Perez, put forth a revision on overtime regulations. This new rule redefined the minimum salary requirements for exempt employees. Additionally, it would have extended overtime payment protections to those executive, administrative, and professional employees who were formerly exempt from overtime pay.


However, in November of 2016, a U.S. District Court in the Eastern District of Texas enacted an injunction which temporarily halted the new rule from taking effect on December 1st of the same year.


As it stands now, the overtime rule has been stalled by the Trump Administration. This is not to say that it won’t, at a future time, come to fruition. Also, each U.S. state has their own Department of Labor which regulates local labor and employee laws.


For example, in California, the minimum wage for those businesses who employ 25 or fewer employees is $10.00 per hour. Meanwhile, the federal minimum wage is set at $7.25 per hour. Per California, nonexempt employees are entitled to overtime pay if they work over 8 hours in a single day and over 40 hours in a given workweek. California’s exemption definition includes:


  • Executive, administrative, and professional employees
  • Employees in the computer software field who are paid hourly
  • Those employed directly by the State of California
  • Outside salespersons
  • Drivers


There are several more exemptions listed on the State of California’s Department of Industrial Relations website. It’s important that you visit your state’s Department of Labor website to determine whether you are following the state and federal employee and labor laws. Contacting a labor law attorney may be the best option for making informed decisions about your hiring process and deciding which employees are legally within the exempt versus the nonexempt classifications.


The primary best practice you can do now to make sure you’re adhering to all labor regulations is to track employee time accurately. Gone are the days of paper and pencil ledgers. Even the ever-popular Excel spreadsheet is becoming less of a viable employee time tracking option. As such, using a specific time tracking software is highly recommended.


Salaried Versus Hourly Employees: A Definition by Law

Though we’ve briefly covered examples of employees who are exempt from overtime pay, there are several important details to review regarding salary amounts as well as general definitions of non-exempt employees.


Hourly Overtime: Nonexempt Employees

The FLSA states that while some jobs are classified as exempt by definition (more on this below), a majority of the exempt versus nonexempt classifications are determined using two factors:


  1. The amount they are paid
  2. The type of work the employee performs


All nonexempt employees are paid at least the Federal Minimum wage, and also must be paid overtime at time and one-half of the regular rate of pay for every hour worked past the 40-hour weekly maximum.


Salary Base Weekly Pay and Overtime: Exempt

This is where the classification process becomes tedious. Exemption status at the federal level is not about job titles; it’s defined by the kind of work the employee performs. An exemption applies if the work is:


  • Directly related to managing the employer’s business
  • Directly related to the employer’s general business operations or the employer’s clients
  • In the computer field
  • Performing outside sales
  • In a “recognized” artistic field (e.g. a professional musician)
  • In a field that requires specific academic training as a method of entry into the profession


If any of your employees fall into any of the descriptions above, then you must pay them no less than $455 weekly. Should you have employees who fit the “computer field” classification, then FLSA requires that you pay them no less than $27.63 per hour.


The U.S. Department of Labor insists that employers who are unsure about the exempt or nonexempt status of certain employees visit and review the Fair Labor Standards Act Advisor. The main page will direct you to a series of questions that will assist you in determining whether or not you are complying with FLSA. A state reference page also exists and lists state level Department of Labor websites for all 50 U.S. states and includes Guam, Puerto Rico, and the Virgin Islands.


The “What If” of the 2016 Rule

A “what if” is still possible with regard to the halted 2016 revised FLSA rules. It’s also important to keep in mind that even the Trump Administration decides to move forward with the nonexempt expansion, additional legal battles are expected to continue.


Right now overtime protections only apply to 7% of U.S. full-time salaried workers. However, this will change if the Obama revision happens. Small businesses can expect an increase in exempt employees’ minimum yearly salary from $23,660 to $47,892.


If you decide to pay employees less than the minimum threshold, then you will be required to reclassify those employees as nonexempt. The reality is that small businesses will likely shoulder the costs associated with the FLSA shift.


For example, The Department of Labor estimates that, overall, the economic yearly economic for the first 10 years will be:


  • $42 million in regulatory familiarization
  • $29 million in adjustment costs
  • $224 million in managerial costs


You will also see an average annual increase in pay to workers of $1.2 billion per year.



If you’re concerned about your employee overtime status, the first recommendation is to visit the U.S. Department of Labor’s website and take a few minutes to answer the questions posed on their Fair Labor Standards Act Advisor. As we’ve discussed, labor laws are modified in some capacity due to state law.


If you don’t have the time to spend digging through the legal confusion of state labor law, consult with a labor law attorney who is licensed in your state. When it comes to accurately tracking employee time, we can help you.


On a final note, Trump has stated that we would like to see a “delay or carve-out of sorts for our small business owners.” Though purely speculative, it sounds as if he wants to revise the new rule so that it is small business owner friendly. Considering that over 50% of the working population in the U.S. is employed by small business, making sure that small businesses are not negatively impacted would be a wise move.