The Department of Labor has issued its first revision of overtime pay regulations since 2004, more than doubling the annual salary at which a so-called white collar worker – someone whose duties are executive, administrative or professional – can be exempt from overtime.

Federal officials estimate that the new limit – $47,892 – will immediately qualify more than 4.2 million workers in the country for overtime if they work more than 40 hours in a week. The new rule also includes an automatic update for the exempt limit every three years, starting in 2020.

The simple goal of the new rule is to ensure workers are properly paid for the time they work. Federal officials have pointed out that the yearly equivalent of the 2004 standard salary of $23,660 is actually below the 2015 poverty threshold for a family of four.

The new rule goes into effect on Dec. 1, 2016, and most businesses should consider following these 5 steps to prepare for the potential financial impact

1.  Check minimum wage laws

While the new rule establishes minimum guidelines at which employees performing executive, administrative or professional tasks do not have to be paid overtime, some states have passed even greater protections for workers. If there were a conflict between an existing state law and the Department of Labor standard, the higher standard would take precedence. Company officials should be sure they are familiar with their state’s minimum wage law – if there is one in place.

2.  Consider salary revisions

Employers should determine how many workers would be affected by the new overtime rule. If increased payments of overtime are a concern, employers have several options.

One is to raise the salary of employees to the new exempt limit. That would make sense in situations where employees were close to the limit already, but could be quite costly for workers who were closer to the old exempt law of just more than $23,000.

A second option for employers analyzing their payroll is to simply pay the new overtime earned by employees who now qualify, particularly if overtime is not a regular occurrence.

A third option is for employers to hire additional part-time or full-time workers, or even seasonal employees, to ensure that work is completed without paying out excessive overtime.

3.  Adjust bonus and incentive payments

Another change in the regulations makes it possible for employers to pay up to 10 percent of an employee’s salary in non-discretionary bonuses and incentive payments. This could allow some companies to boost the pay of workers above the new exempt levels with commissions or with bonuses that are tied to profitability or productivity. Companies that pay out very large commissions or incentive bonuses would not gain an advantage because of the 10 percent cap. 

4.  Notify employees

It is certainly likely that many companies will either change the payment classification of some workers or put into place new restrictions on overtime as a way to handle the anticipated financial fallout from the new rule. Some employees might be placed on different schedules or receive bonuses or a raise, and communicating this information as soon as possible to workers will be important. 

5.  Meet the December 1 deadline

The rule applies to companies that are covered by the Fair Labor Standards Act and becomes effective on December 1, 2016. The FLSA regulates pay, record keeping and youth employment standards in the private sector as well as for federal state and local government employers. It is the FLSA that has set the federal minimum wage at $7.25 an hour. Most companies with an annual gross volume of business of $500,000 or more are covered by the FLSA. Some observers have said the short time frame before the rule becomes effective could be an issue for some companies, particularly smaller businesses.

Learn more:

Overtime pay information from the Department of Labor and Society for Human Resource Management