With compensation taking up the biggest slice of the benefits pie, employers are paying close attention to the Department of Labor’s proposed changes to the overtime rules – expected to be released as early as this month – under the Fair Labor Standards Act.
The proposed rules bump the salary threshold for overtime from $23,600/year to $50,440/year. If the final rules stay the same as the proposed rules, employees currently working in salaried positions who make less than $50,440 will now be entitled to overtime pay. That’s a 113% increase, which is “incredibly dramatic,” says Lisa Horn, spokesperson for the Partnership to Protect Workplace Opportunity.
“Not only does it raise it that high, but what many have failed to hone in on is the fact that this is an annual increase,” she adds. “That’s quite impactful on top of that huge initial jump in the salary increase.”
Horn says some research predicts that because of that annual increase, which is tied to the 40th percentile of all full-time salaried workers in the country, the minimum salary threshold for overtime could rise as high as $90,000 within five to seven years.
It’s possible the final rules could include a lower salary threshold – Horn says she’s heard it could be $47,000/year instead of $50,440 – but even if that’s the case, it will still mean a big jump. Employers will have to decide whether to increase workers’ salaries to make them exempt from overtime or reclassify them as non-exempt.
And since many employers have different benefit structures for hourly and salaried workers, if some employees need to be reclassified as non-exempt they could see their benefits affected.
Moreover, in the eyes of employees, being reclassified as non-exempt is “seen as a demotion,” says Horn, who also works as SHRM’s director of Congressional affairs. “Because you’re continually trying to climb most employees from that non-exempt hourly status to the more professional exempt status.”
Here are five things employers need to know about the proposed rules from the PPWO, a group of more than 70 employer organizations and companies created to respond to the overtime rule changes:
1. This proposal represents a 113% immediate increase plus an annual increase. The proposed overtime rule would initially raise the salary threshold defining which employees must be paid overtime by 113%, from $23,600 to $50,440. In addition, the DOL has proposed increasing this minimum salary on an annual basis.
2. The proposal will impact millions of workers and cost billions to businesses. According to the DOL, the rule will affect over 10 million workers – workers who may see their workplace flexibility diminished or a loss in other benefits they rely on, says the PPWO. The National Retail Federation estimates retail and restaurant businesses will see an increase of more than $8.4 billion per year in costs.
3. The implementation window is very short. As proposed, the implementation timeline for this rule is only 60 days, which will place a massive burden on HR departments and organizations scrambling to comply, according to the PPWO. “That 60 days is just completely unworkable from an organization’s standpoint and having to implement these changes in such a short time frame,” says Horn. “These are, for some organizations, really massive changes.”
4. Many employees will need to be demoted. This change could force employers to reclassify professional employees from salaried to hourly – including many managers and those with advanced degrees – resulting in a loss in benefits, bonuses, and flexibility, and a reduction in professional opportunities.
5. This is a blanket increase that disproportionally impacts lower cost areas. A one-size-fits-all approach is inappropriate for the different industries and various regions of the country. While the threshold of $50,440 may be reasonable in New York City, a comparable cost of living in Birmingham, Alabama, for example, is only about $21,000 – making the threshold unattainable and unrealistic for many small businesses in lower cost of living areas, according to the PPWO.
