By Lisa M. Purichia
Partner, Director of Entrepreneurial Services & Employee Benefit Plan Services
Last month President Obama announced changes in overtime pay rules that could see more than 4 million U.S. workers become eligible for “time-and-a-half” wages who currently aren’t. And that means business owners are scrambling to see how the sudden shift will affect their payroll and bottom line.
Currently anyone who makes more than $23,660 a year is exempt. The Obama administration’s change roughly doubles that threshold to $47,476. Bonus payments can count toward the total. The rule change is set to take effect Dec. 1 of this year.
Overtime rules date back to the 1930s, requiring employers to pay 1½ times a worker’s regular salary when they exceed 40 hours of work in a single week. Overtime rules are also regulated by individual State Regulations, which do vary. Since their inception the rules have been gradually relaxed to exclude management and most salaried employees. Roughly 62 percent of full-time U.S. workers qualified for overtime pay in 1975, compared to just 7 percent today.
Many industries are cyclical, requiring long hours during crunch time and a more regular schedule during the offseason. I can certainly assure you that during the tax filing season, there isn’t a CPA in the land working less than 40 hours!
The White House estimates the rule change will raise wages by $1.2 billion over the next decade – which obviously means companies will have to come up with a way to pay for the increase, or adjust their business model to compensate.
The most likely outcome is businesses will reduce employees’ hours to avoid paying overtime. There is also concern among small business owners they will be burdened with increased paperwork and scheduling issues because they’ll have to more closely track working time. Salaried workers may be converted to hourly ones.
Retail stores and restaurants appear to be the industries most immediately impacted by the change.
Expect this to be a difficult and emotional transition for many impacted employees. That’s why it’s important to start analyzing how the new rule will affect your company, and develop a communication strategy to tell your workers how you’re going to implement it.
Many employees perceive being paid a salary instead of having to track their time worked as a preferred status. Others who are now paid hourly will resent being moved to a salaried position above the new threshold, perceiving their pay as being “capped” with a limitless demand on the number of hours they’re expected to work.
If you choose to raise the salary of some employees above the $47,476 threshold, this may produce “compression” with other job positions and pay scales. For instance, a manager may find herself earning the same or little more than the people she supervises.
The first thing you should do is undertake an audit of your workforce and make a list of currently exempt salaried employees who fall under the cap. Ensure the job descriptions of these positions are up to date – it would be advisable to do this for the entire organization.
Communicate the rule change to your employees and let them know you’re developing a plan for implementation. It would also be wise to have your Human Resources team (or provider) evaluate your entire benefits package to ensure rewards programs are meeting their objectives.
If you need advice on preparing your organization for the changes in overtime rules, we recommend you seek legal counsel with an attorney who specializes in employment and labor law.
If you do not currently have a relationship with such a resource, please contact Lisa Purichia at (317) 608-6693 or email [email protected] and we can refer you to names of attorneys who specialize in employment and labor law.