Be aware there are major changes coming with how you pay your employees. If you have salaried employees earning less than $50,440 per year ($970 per week) they will be eligible for overtime, if the Department of Labor’s (DOL) new Fair Labor Standards Act (FLSA) regulations take effect in 2016. Under the proposed rules the salary threshold would be set at $50,440 per year for the executive, administrative, and professional employee.
The overtime rules have not been updated since 2004 when the threshold of $23,660 ($455 per week) was established, and under the current regulations the salary threshold is below the poverty level for a family of four. The DOL intends to continue to raise the proposed salary threshold of $50,440 on an annual basis to keep pace with inflation.
The DOL stated that at “the proposed salary level, the number of overtime-eligible salaried white collar employees paid at or above the salary level would be reduced by more than 50%.” The DOL projects that the proposed rule will extend overtime protection to nearly 5 million white collar workers within the first year of its implementation. This will significantly impact the retail and hospitality industries and greatly affect small businesses.
The new regulations are coming and businesses will have to comply. It is just a matter of when.
A chief concern employers have with the proposed overtime rule is how they will afford the overtime for additional people, assuming the salary threshold for exempt positions is raised and more employees become eligible for overtime. Research from the National Retail Federation and Oxford Economics study suggests that employers will minimize the impact of the additional labor costs by:
- Lowering hourly rates of pay to leave total pay amounts largely unchanged
- Cutting bonuses and benefits to increase base salaries above the new threshold
- Reducing some worker’s hours to fewer than 40 per week to avoid paying overtime, cutting compensation proportionally
- Hiring new, lower-wage and largely part-time hourly workers
Three scenarios provided below demonstrate how raising the salary threshold could significantly increase direct payroll costs, impact employee morale and engagement, and increase administrative costs and burden if you aren’t prepared to address these changes before they occur.
Scenario One: Raising the salary threshold will increase direct payroll costs. Consider the following example of how reclassifying a salaried employee as non-exempt can very quickly increase your payroll costs.
- You are currently paying a salaried employee $35,000 per year. Dividing the employee’s salary by the standard number of work hours in a year (2080) equals an hourly rate of pay of $16.83 per hour. If the employee works an average of 45 hours per week, the employer will be required to pay 5 hours per week of overtime. Assuming the employee takes 3 weeks off for vacations and holidays the employer would only pay overtime for 49 weeks a year. In this situation, your payroll could increase by $6,185 ($16.83 an hour x 5 hours a week x 1.5 x 49 weeks). This 17.67% increase does not include the additional payroll taxes employers will pay on the increased earnings.
Scenario Two: Raising the salary threshold will have an impact on employee morale and engagement. Consider the following example of lowering hourly rates of pay to leave an employee’s total amount of pay unchanged (keeping both the employer and employee whole).
- Using the same example from above, the employee will be paid straight time for 2,080 hours each year. The employer will also pay the employee 245 hours of overtime annually (49 weeks x 5 hours). Because overtime is paid at time and a half, the 245 hours of overtime equals 368 hours of straight time (245 hours x 1.5). This means that the employee will be paid the equivalent of 2,448 straight-time hours per year (2080 + 368) or an hourly rate of $14.30 ($35,000 divided by 2448 hours). This keeps both the employer and employee whole, since the employee will work the same number of hours and make the same amount of pay as before the change. What this doesn’t take into consideration is the impact on the employee’s morale and engagement.
Think about this. The employee was salaried coming and going without recording their time. There was inherent flexibility and perceived “status” built into being paid a salary. Now the employee is required to record the hours he/she worked and be paid an hourly pay rate that could be perceived as a “decrease” in hourly pay, even though mathematically the employee is earning the same amount. Most employees will take their salary and divide it by 2,080 hours to determine the hourly pay rate. In this situation, dividing $35,000 by 2,080 hours equals an hourly pay rate of $16.83, not $14.30 ($35,000 divided by 2448 hours). As illustrated above, employees are going to have a hard time digesting this rationale.
Scenario Three: Raising the salary threshold will increase the number of employees classified as non-exempt which, in turn, increases administrative costs.
- Nearly all employers, whether large and small, will incur significant time and expense evaluating whether their positions currently classified as exempt will still qualify for exemption and, if not, determining what actions to take. The potential increase in labor costs, in many cases, will be significantly less than the hidden costs of resources necessary to manage the additional recordkeeping and payroll administration, difficult employee issues, employee morale and engagement, scheduling complications, expanded training, and other human resource considerations. For example, a major administrative burden and potential employee relations issue will be training formerly exempt employees on how to accurately complete timekeeping records, educating them on what they need to know about complying with meal and rest breaks, and informing them of restrictions on working outside of their normal work hours, overtime rules, travel time, and other compensable time issues such as on-call pay, etc.
As revealed by these three scenarios, the proposed changes not only impact the financial aspects of your business they also have a significant impact on employees morale and engagement. Now is the time to get creative and develop strategies to incorporate into your business to minimize the impact of these changes. Make a plan now so that you don’t absorb additional labor costs and you continue to keep your employees engaged. Listed below are some proactive steps to consider as you begin to plan for these changes.
- Take time to review and re-evaluate exemption classifications. This will ensure you are compliant with the upcoming changes and prepare to reclassify salaried employees who do not meet the new salary threshold.
- Budget for salary increases and/or increased overtime costs. When the rules become final and exempt employees fall below the new salary threshold, employers will have two options: (1) reclassify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek; or (2) raise their salary to meet the new requirement. Remember, as an employer you are not required to guarantee that an employee will receive overtime work.
- Create a clearly articulated overtime policy and educate employees. Include procedures in the policy such as requiring prior authorization for working overtime. Inform employees that working unauthorized overtime will result in disciplinary action.
- Train formerly exempt employees on timekeeping systems and the importance of accurately recording time worked. Train management on the importance of reviewing and signing off on time worked and authorized overtime. Address disciplining employees for unauthorized overtime with management.
- Inform and educate employees on changes to help address issues and concerns before they turn into bigger problems. Employees who are reclassified from salaried to hourly often view the reclassification as a “demotion” and may resent being converted to hourly pay. Therefore, frequent communication with employees regarding their reclassification is key.
The DOL ended a 60-day review period for the proposed rule September 4, 2015. The final rule is expected to take effect sometime in 2016. For more information and updates on these changes visit the following websites:
Department of Labor Overtime Pay Resources at http://www.dol.gov/whd/overtime_pay.htm
Department of Labor – Frequently Asked Questions at http://www.dol.gov/whd/overtime/NPRM2015/faq.htm
Society for Human Resources at http://www.shrm.org/pages/default.aspx
About Sue Jones
Sue Jones, founder and managing director of KLS Group, is passionate about creating strategic human resource programs and services to effect positive change in organizations. She is an innovative HR leader experienced with both large and smaller businesses. Sue has worked in many different industries and is adept with transferring her knowledge, skills and abilities across business channels. An experienced HR professional, Sue brings a fresh approach to her clients, addressing their needs in a personalized manner. Sue is a Veteran of the US Navy, holds a Master’s Degree in Business Administration from Northeastern University and is both SHRM-SCP and SPHR certified.
About KLS Group
Today’s business landscape is complex. Companies rely on KLS Group for all of their human resource needs, from consulting to training to recruitment. Based in Bend, Oregon, KLS Group serves businesses large and small throughout the US.
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