The Obama administration on Wednesday, May 18th announced the final details of new labor rules to increase the salary cutoff for overtime pay. Although the plan was outlined a year ago and employers have several months to comply, many say the change will be a challenge to small businesses who offer flexibility, allow employees to work from home, have bonus structures falling within the pay level, and much more. Also, it poses yet another administrative headache to businesses already struggling with the new regulations due to IRS reporting requirements, the Affordable Care Act, and much more.
Here’s what we know:
- Currently, salaried employees who earn more than $23,660 a year and meet other criteria are not entitled by law to overtime pay, which is 1.5 times an equivalent hourly wage after an employee works more than 40 hours a week.
- The threshold is scheduled to roughly double, to $47,476, on Dec. 1, 2016. That means millions of workers who were salaried will have to have their hours tracked to see if they qualify for overtime pay.
- The Labor Department estimates an additional 4.2 million executive, administrative and professional workers who earn above the old threshold but below the new one will be entitled to time-and-a-half wages for each hour they work beyond 40 a week.
- For the most part, hourly / blue collar workers are already entitled to overtime regardless of their earnings level and will continue to be.
- The practice of comp time — giving employees who work extra time a day off down the road — will also change. With the new rules, for employees in the private sector making less than $47,476 a year, comp time will not be an option.
- Every three years there will be an automatic salary threshold increase
- The highly compensated employee (HCE) exemption is now $134,004 per year
Employers will have various options. They could change the pay structure for employees making less than the new threshold to an hourly rate. They could raise the pay above the threshold so they won’t need to worry about overtime. They could even cut the base salaries of those who regularly work more than 40 hours, in expectation that overtime pay will make up the difference.
Business owners are already worried about performance, and other factors pertaining to workplace culture. Moving workers to an hourly rate is one option for employers. Another strategy could be to hire more entry-level employees and minimizing overtime pay for the affected salaried employees. Hiring freelancers and independent contractors is another way to manage costs. By doing so, one could increase operations in busy times and not have overtime be a yearlong worry.
Over the years, businesses have had to adjust for minimum wage increases for hourly employees in cities and states around the country. And unlike changes to the federal minimum wage, changes to the overtime threshold do not require an act of Congress. As of last month, many companies weren’t even aware that the changes were imminent. Since this law takes effect on December 1st, the short period of time before the new rules take effect is worrisome to business owners. It’s a huge increase (more than double), and it came out of nowhere for many. There is no phase-in period for the new overtime rule, which is much different than other wage regulations.
Also, the new threshold is expected to be the same across the country, with no adjustments for local conditions. This is puzzling to many, given the disparity in median income across many areas of the country.
Even the employees who would benefit may be unhappy with the rule change. Salaried employees aren’t used to tracking their hours and won’t want to do it, even if it’s to their benefit. Opting out of the rule is not a choice for companies with any employees who make less than the threshold.
As always, the NARFA Team is here to support our members with any questions or concerns with this or any other rules and regulations taking effect. The past few years have proven challenging for businesses of all sizes, and we exist for the health and well-being of our member businesses.
If you would like to learn more about NARFA and our association serving the automotive, roads, fuel, and related industries, please visit our website. Our employee benefit programs, best in class administrative support, and much more are a huge reason why hundreds of our member businesses remain stable and successful during uncertain times such as today.
Please contact us today to find out how we can help your business continue to grow and stay strong!