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Property Casualty

A Bump in Overtime Pay Could Mean a Slump in Wages

Harold Kavan
Harold Kavan
Property Casualty

If you’ve listened to radio or TV news reports about the economy, read the newspaper, or been to any online news outlets within the last week, you’ve likely seen or heard the headlines about the new overtime rules for businesses.

If not, here’s what you missed.

Less than one week ago, the Obama administration announced it was making millions more employees eligible for overtime pay. The new regulation, issued by the Department of Labor (DOL), essentially doubles the threshold at which executive, administrative, and professional employees are exempt from overtime pay to $47,476 from the current $23,660. What this means is that now about 4.2 million additional workers are expected to be eligible to receive time-and-a-half wages for each hour they put in beyond a 40-hour work week.

The new regulations will automatically update the salary levels every 3 years to “ensure that they continue to provide useful and effective tests for exemption,” the DOL said.

The final rule is set to go into effect on December 1, 2016, with the 3-year calculations set to begin on January 1, 2020.

Employee Impacts

Now, the first assumption most people have is that with improved overtime pay rules comes a fatter paycheck, right?

Unfortunately, that’s not necessarily the case. Here are a couple of scenarios that could happen. An impacted employee may:

  • Start receiving overtime pay
  • Get a small raise. This would move the employee above the threshold and essentially eliminate the need for the employer to pay overtime
  • Not get any additional pay, his or her status would get changed to “non-exempt,” and he or she would not get any additional hours
  • Get paid for overtime hours, but his or her employer may adjust the hourly rate to essentially offset any overtime the employee is owed. This basically means the employee would take a pay cut in his or her hourly rate.

The other part to this is that employees who are already above the threshold and aren’t eligible for overtime pay may be asked to take on additional duties.

Employer Impacts

These new regulations set in motion a whirlwind of emotions and discussion and could potentially negatively impact workers at businesses covered by the Fair Labor Standards Act (FLSA) — particularly workers in the healthcare industry and other non-profit operations.

These rules may force employers to place strict limits on an employee’s ability to earn overtime pay or consider a downward adjustment in an employee’s base rate with the anticipation the employee will work a certain amount of overtime and net the same income he or she was making prior to the ruling. This comes on top of the pressure healthcare organizations are facing in some jurisdictions due to wage pressure from the increase in minimum wage.

Some smaller operations may find it difficult to absorb the added cost. Some fear it will mean demoting white collar workers, adversely affecting workplace cultures. This may also cause businesses to change an employee’s status from “exempt” to “non-exempt” under the new rules.

Since some employers offer “non-exempt” employees less generous benefits than “exempt” employees, such as vacation accruals, health benefits, or bonus eligibility, there’s the potential for some very dissatisfied employees.

Time Will Tell How FLSA Will Impact Companies

Since the final rule was just released, time will tell how companies will address the regulations and overcome any heartburn or issues that may be caused. One thing to keep in mind is that the rule could still be challenged from a legal perspective.

If you’re still struggling to understand the ruling, you’re not alone. The DOL has developed factsheets that includes several frequently asked questions and answers that I’ve found helpful and you may, too. I’m including that here for you.

Miles Weis, our Holmes Murphy Executive Risk Practice Leader, also recently wrote a blog titled “A Waging War” that specifically addresses parts of the rule and information on wage and hour law violations that you may find extremely helpful.

Additionally, we have a lot of resources on hand here at Holmes Murphy that can help you walk through how these regulations could impact your business! Feel free to comment below or reach out. We’re here to help!

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