Overtime Overhaul: Are You Prepared for the New Rule?

Overtime Overhaul: Are You Prepared for the New Rule?

As human resource professionals anxiously await the U.S. Department of Labor’s (DOL’s) final changes to overtime exemptions, it is becoming evident that the rule will cost many employers a lot of money.

Here is how the rules work: The Fair Labor Standards Act (FLSA) has always required that all hourly workers get paid time and a half for all hours worked over 40 in a workweek. Until these new rules, salaried workers who are paid more than $23,660 per year were exempt from overtime pay. The new rules now up that amount to $47,467. This number, which is 40th percentile of the earnings of full-time salaried workers in the lowest-wage Census Region (currently the South), gets revisited every three years.

The definition of a “highly compensated employee” until now $100,000 salary, is upped to $122,148, which is 90th percentile of the same Census Region number above. It too gets revisited every three years.

The DOL estimates that 7.4 million employers will combine to spend $592.7 million to comply with the rule. That calculation comes from a cost of $254.5 million to become familiar with the regulation, $160.1 million to make the necessary adjustments, and $178.1 million in managerial costs.

Additionally, the net transfer from employers to employees will total $1.48 billion, the DOL estimates, with the vast majority of that total resulting from more overtime compensation or salary increases.

Virginia Wesleyan College in Norfolk, Va., for example, estimates the overtime rule would increase expenses about $712,845. Salary obligations account for $657,000 of that total while additional contributions to retirement plans account for $55,845.

Many businesses have not budgeted for these new expenses, and nonprofits and local governments will be hit especially hard as they don’t have the necessary resources to increase salaries above the exempt salary level threshold.

Opportunity for Employers

Some factors to consider in reclassifying employees are:

• Cost to absorb and manage overtime
• Morale concerns. Employees who have worked their way up won’t like the stigma of punching the clock and will feel as if they’ve been demoted, potentially leading to increased turnover.
• Inconsistencies for large employers that may need to reclassify the same position differently based on local economics.
• Blurrier lines between department managers and staff, as supervisors may pick up responsibilities if certain duties once performed by reclassified workers are reassigned.
• Impacts on services and whether or not extra work performed by now-exempt employees will not happen after a reclassification
• The temptation to use independent contractors more.

Unaffected Provisions

Other pay provisions will not be affected, including:

• Outside sales. No change was made to the provision that minimum pay is not required.
• Computer professionals. Again, no change here – computer professionals must still be paid an hourly rate of $27.63 or higher.
• Licensed professionals. These employees, such as lawyers and doctors, are still not required to be paid a salary or minimum wage, and may work on a fee basis.
• Certain retail employees. There is no change for retail employees paid on commission under the Section 7(i) exemption.

Steps to Take Now

First, employers should identify exempt positions where employees earn under $50,000. Next, decide which positions to increase the salaries above the new salary level. For employees to be reclassified, consider determining:

• What tasks those employees perform each week and how many hours they usually work.
• Which job duties can be redistributed or eliminated.
• If an entire job function can be outsourced.

After converting employees to hourly work, employers must put restrictions on overtime work. Other adjustments to communication plans and training should be taken into account. While surely not the end of the world, the overtime rule does change how companies go about their business.

Financial rules and regulations will continue to change over time, and as an employer, you must remain flexible to make the most of each situation. OptiFour Integrated Wealth Management has provided financial planning and execution, risk management, and wealth management for the Washington, D.C. area for over 25 years. For more information on our services, visit our homepage today.