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Managing the Impact of the New Overtime Provisions on Your Bottom Line

Updates to the FLSA Take Effect on December 1, 2016

By Jodi Schafer, SPHR, Owner, General Partner, Human Resource Management Services

In May of this year, the Department of Labor (DOL) announced significant changes to the federal wage and hour law that establishes minimum wage, compensable hours and overtime provisions. These updates to the Fair Labor Standards Act (FLSA), the first in more than 12 years, will impact the overtime provisions for white-collar workers most severely. Under the new FLSA language, which takes effect on December 1st of this year, the salary threshold for 'exempt' employees will increase from $455/week ($23,660 annually) to $913/week ($47,476 annually). The Obama administration projects that this change will result in more than 4.2 million workers gaining overtime protections or receiving a raise in their salary to retain their 'exempt' status.

To gauge the potential financial impact of these FLSA updates on your bottom line begin by identifying all current exempt employees making less than $47, 476/year. You can either choose to increase their salary to meet this new threshold by December 1st or reclassify them as nonexempt. For those employees making close to this new dollar amount, an increase could be the easiest route to go. However, raising the pay of this subset of your workforce for reasons not associated with merit or tenure may cause a ripple effect with the rest of your staff. Be prepared for a lot of "that's not fair" and "what about me" discussions.

If the pay increase would be cost prohibitive or would cause too much internal strife, you will be forced to reclassify these employees as nonexempt and they will become eligible for overtime compensation. If you are unsure of how much overtime your at-risk exempt employees are currently working, you should take these next few months to run a few time studies to help gauge the impact to your bottom line.

If the amount of overtime worked is MINIMAL, you may decide to:

  1. Convert their current salary to an hourly equivalent and pay time and a half for any hours worked over 40, or
  2. Continue to pay your employees their current salary (base pay) rate, but require to submit an exemption report for any hours worked above and beyond 40 so that time a half can be paid for those hours.

If the amount of overtime worked is SIGNIFICANT, you may decide to:

  1. Limit their work hours and potentially hire part-time and/or temporary staff to fill in as needed, or
  2. Reduce other benefits being offered to offset the anticipated increase in payroll expenses, or
  3. Reduce base rates of pay so that when you account for the overtime costs (1.5 x the base rate), the net impact is budget neutral; assuming the reduced base rate doesn't drop employee pay below minimum wage.

Options #4 and #5, while potentially budget neutral, are not a great options for employee morale and retention which means that budgeting for the extra costs associated with increasing salaries, rising overtime costs or the addition of part-time staff needs to start now. The Michigan Lodging and Tourism Association will continue offering various articles, webinars and 'ask the expert' panel discussions over the coming months to help you navigate this significant change.

Find out if you have to comply with the Fair Labor Standards Act (FLSA) >>

 

Posted in: Federal Government News, Hot Topics, News for Practices