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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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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.’

To stay abreast of employee benefits and other tangential issues, we invite you to subscribe to this blog.