During the past year, most of the advisory industry and its observers have been focused on the Department of Labor’s new rules for retirement advisors, which take effect this April. But most folks have overlooked another new DOL rule due to take effect on December 1 (yes, that’s this year). 

That rule will also have a major impact on the independent advisory industry: The new DOL White Collar Exemption Rules Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees under the Fair Labor Standards Act.

In short, that mouthful of a rule redefines the salary and compensation levels under which employers have to pay overtime to their employees. And it will potentially affect most advisory firms that employ anyone. As a business consultant to the industry, we rely upon many partnerships to implement our recommendations. One of the relationships I’ve used over the years is with New Jersey-based MarketCounsel, and the Hamburger Law Firm. Not only do they handle the complicated compliance aspects of owning an RIA, but they also provide knowledge and perspectives about the advisory industry as a whole.

To find out more about the DOL’s new overtime rules and its exemptions, I talked with Marc Cohen, managing director at MarketCounsel, recently in a phone conversation.

What follows are the top eight questions I believe owners of independent advisory businesses should ask about the new rules and Marc’s answers about the practicality of complying with them [and with my comments in brackets]:

1) What are the new thresholds for paying overtime to employees?
The old standard required overtime compensation for employees who made less than $455 per week or $23,600 annually, who worked more than 40 hours a week to get overtime. The new standard raised that compensation threshold to $47,476 annually or $913 per week.”

[Basically this means if you have an employee who is getting paid less than $47,476 on December 1, you need to start tracking time and pay them overtime.]

2) Are there any small businesses exempt from the new rules?
Yes. As we understand it, any firm producing under $500,000 in gross annual revenues is exempt.”

[In other words, if your gross revenue is under this amount you do not have to follow the rules. You can choose not to pay overtime under some or all circumstances.]

3) How are you recommending advisory firms handle this new ruling if they are not exempt?
“Many advisory firms will find value in working with a Professional Employer Organization (PEO) to support them with the various administrative and compliance issues that may arise with managing their employees, including these new regulations. It’s another area that is typically not within an advisor’s core competencies that they can outsource to an expert. A PEO will help them handle and maneuver through these issues and ensure that they are compliant.”

[While I recommend PEOs as a best practice as well, the new ruling suggests that it would not be good for any firm with under $500K in annual revenue to work with a PEO, because technically the PEO becomes the employer, and would most likely eliminate the small firm exemption. When designing a human capital strategy, one of the first steps my consulting firm often takes is getting firms set up with a PEO. The PEO provides a first-class human capital experience with an array of affordable benefits. Even if it is a smaller firm, we often recommend a PEO. We do this because we can attract and retain talent with the help of the PEO experience. With the PEO, even smaller firms can compete with mega firms on benefits and continued education. With the new DOL ruling, the firm size and growth goals are all considerations in determining the cost/benefit of working with a PEO.]

4) How is overtime calculated? “From a Federal perspective, it is calculated weekly.”

[Make sure you consult your employment attorney and/or PEO on how this should be calculated. There may be other laws that trump the Federal law. For example, in California, overtime is calculated daily.]

5) What about that time that employee spend on cell phones, laptops, computer system, etc.?
With all the technology we use today, we can realistically track when an employee is working.  So, technically, we know the time they work. However, more practically, when reporting hours, there really has to be an honor code: If an employee is saying he/she is working 40 hours per week, and acknowledge their reporting is being relied upon, then that is what they work. Practically, it would be rather challenging to review all the software and check the employee’s hours each week.”

6) How is the total amount of compensation calculated?
“Compensation used to determine whether an employee passes the salary test can include nondiscretionary incentive compensation (i.e. performance compensation based on a formula instead of management’s discretion) in addition to base salary, but only up to 10% of the required minimum compensation.”

7) How should we handle larger silo firms?
There are rare exceptions where a truly siloed structure, with separate business entities, truly makes sense. For those situations, we recommend those firms create an operating company to manage the firm’s operating expenses, including personnel costs. If all the employees are managed out an operating company, which supports more than $500K in revenue, then we need to comply.”

8) What do you think is a best practice for tracking time?
“For some employees, such as a receptionist, it’s not much of a challenge as it’s unlikely that their professional responsibilities will follow them outside of the office.  However, with the increased trend towards working remotely and the greater reliance have on many employees to support their business development and client relations efforts, there are more employees whose time we would have to closely monitor under the new laws. 
“Frankly, I would recommend not dealing with that. I would try to make all employees meet the salary requirements for exempt status (of course, you then face the responsibilities tests). Firm owners need to consider the cost of simply meeting the salary requirement vs. the cost of paying overtime and the administrative overhead associated with it.”

[While Marc’s advice about exempting all employees is generally easier, in my experience, it’s not feasible for all firms: Some just can’t afford to pay all their employees more than $47,476 per year.  Consequently, many advisory firms are having to make some hard choices in the wake of this new rule. For instance, some firms are considering restricting younger employees from attending company social events and/or going to professional conferences, to keep their hours under the threshold. Others are considering hiring one experienced employee for more than $50,000 a year, rather than two younger employees for, say, $36,000 each.]

It’s unfortunate that a rule change intended to help lower-paid employees may have just the opposite effect. An effect that will ultimately hurt the very talent we in the advisory industry so desperately need—younger people.