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Higher Employer Payroll Costs
Welcome to the ‘New Normal’

Timesheet for OvertimeLocal and national headlines continue to vie for our attention regarding the minimum wage that hourly workers receive. In addition to the federal level, many states and local statutes have raised their own minimum wages.

But a May 18 release of the final federal Fair Labor Standards Act (FLSA) overtime regulations will affect employers regardless of location.

In July 2015, DOL draft regulations were released asking for comments to their revised regulations governing which executive, professional and administrative employees (white collar workers) are entitled to FLSA’s overtime pay protections. Since last updating these regulations in 2004, the current salary cap for exemption (from overtime pay) is above $455 weekly, or $23,660 per year.

The final rule will increase the salary level for full-time salaried workers to the 40th percentile of weekly earnings (taken from the lowest-wage region – the South), or $47,476, for the next three years, beginning December 1, 2016. The final rule also has changes to the exemption for highly-compensated employees (HCE). Presently, to qualify for this exemption, employees must earn at least $100,000 per year. The new exemption threshold for HCE’s would be tied to the 90th percentile level of earnings for full-time salaried employees – or $134,004 in 2016. Like the standard salary level, the HCE level will increase every three years, beginning January 1, 2020. The DOL Q&A on the final regulations is helpful.

The DOL projects that 4.2 million employees who are exempt during the current regulation (due to earning at least $23,660 per year) will become non-exempt due the proposed higher-salary threshold. Because this expected new regulation will become reality on December 1, employers will need to act soon to minimize a major impact to their bottom line. In Iowa, 44,000 workers are expected to become eligible for overtime pay under the new rules.

At the bare minimum, employers are advised to conduct a wage and hours audit to assess whether employee classifications will continue to be correct based on the new salary thresholds. In addition, analyzing employee duties will be extremely important, especially those who are affected by the changes in their compensation limits. A DOL general guidance to private employers was also released on May 18.

When assessing how to react to the new regulations, employers may consider each of the following three options:

  1. Boost the salary for those who are currently earning amounts that are close to the new minimum threshold so that they will now be over this new threshold amount. By doing this, the employee will remain exempt from overtime pay.
  2. Convert salaried employees to hourly and implement a new workplace policy that they cannot work more than 40 hours per week.
  3. Shift salaried employees to hourly and pay overtime – which is 1.5 times their normal hourly rate.

Without question, there will be pain points for BOTH employers and employees. Some employees will be happy with the pay increase, while others may perceive the changes to be a demotion or a possible obstruction to ‘climbing the ladder.’ In addition, organizations will need to evaluate the eligibility for benefits with any changes being made for hourly-paid employees, etc.

To comply, organizations will need to act quickly – even BEFORE the dust settles.

Regulations can be successful if properly planned and implemented, but the cost of regulations may be detrimental to the health of the economy – and possibly to its’ workers.

And so it goes…welcome to the employment world’s ‘new normal.’

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