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Overtime Pay Regulation Can Impact Employee Benefits

Cat and Mouse GameSir Isaac Newton’s third law of motion may apply to the latest final rule issued on May 18 by the Department of Labor (DOL) regarding overtime pay. The rule will significantly alter employee pay structures, which will consequently push employers to evaluate their ‘total awards’ approach to the workplace. Newton’s third law is simply:

For every action, there is an equal and opposite reaction.

This third law can also be analogous to a ‘cat and mouse game,’ whereby, the ‘cat,’ in this case, the DOL, is attempting to secure a definitive victory over the ‘mouse,’ played routinely (and reluctantly) by employers, both small and large. As the game is generally told, the cat attempts to catch the mouse, while the mouse runs away to avoid capture (and become a meal!). The mouse is usually unable to defeat the cat, but is able to find ways to ‘survive’ and live for another day. In fact, in most cases, the contest is never-ending – and often futile for both. Most everyone will acknowledge this game is a huge drain on energy and resources for both players. Nonetheless, the game is played.

The DOL’s intent to raise workers’ earnings will assuredly cause many employers to react differently than intended by the DOL. One logical ‘survival’ method for employers is to lower base salaries to help offset the potential cost of having to pay overtime to certain employees. Another reaction is to reclassify salaried workers to become hourly, or preclude newly nonexempt salaried employees from working over 40 hours per week to avoid paying overtime. The compensation system for white-collar employees may require a complete overhaul, with employees having to learn to record their time. Employers, like mice, look to find survival methods to escape the next regulatory ‘pounce.’

Are employee benefits immune from this new regulation? We are too early in the game to know for sure. However, we can surmise that previously-exempt employees who are converted to nonexempt status may possibly lose additional benefits that are only reserved for exempt employees. Eligibility for benefits such as medical, dental and vision, which typically flow through a Section 125 cafeteria plan, would most likely not affect employees who are nonexempt (hourly) or exempt (salaried), due largely to nondiscrimination rules. Qualified retirement plans also have stringent nondiscrimination testing requirements.

With other benefit offerings, however, it may get very interesting. Some organizations offer additional benefits to salaried and exempt employees, such as richer paid-time-off (PTO) days, including vacation. Under this scenario, it may be advisable to offer paid leave components on the basis of tenure and job level – rather than using exempt and nonexempt status. Seeking legal council is advisable.

As we have observed through our annual Iowa Employer Benefits Study©, certain budget-challenged industries (e.g. construction, hospitality and retail, etc.) may likely offer employer-paid group life and disability coverages only to salaried employees. Employees that lose salaried status could very well lose eligibility for these types of benefits. Another possibility is that such benefits may no longer be employer-paid, but rather, become completely voluntary benefits (employee pays all).

Similar to the mouse, employers must find new approaches to comply with the game dictated by the cat. Balancing the cost component of pay and benefits against reduced morale and high turnover is very delicate, and making this new transition will require newly-considered approaches with a different mindset.

What is your culture and how can it be leveraged in the future? In addition to avoiding the cat, watch out for any traps around the corner!

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