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The Unintended Consequences of the New Overtime Provisions on Your Work Culture

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

Well -- it's finally happened. The Department of Labor (DOL) has updated the Fair Labor Standards Act to align more closely with current compensation trends -- something it hasn't done in more than a decade. The biggest impact of this change focuses on your exempt staff who are currently making less than $47,476/annually. Their pay will need to be adjusted to this new threshold if you wish to retain their 'exempt' status, otherwise they will become eligible for overtime after December 1st of this year. For many employers, raising employee compensation to keep pace with the FLSA regulations may be cost prohibitive, but changing an employee's status from exempt to nonexempt is not as easy as flipping a switch.

Many employees view their exempt classification as a status symbol and may feel slighted by a change from salary to hourly or perceive it as a demotion. A change such as this may also have an impact on the benefit levels employees receive, as often times an employer will establish richer vacation policies, benefits and/or more flexible work schedules for exempt-level employees. Aside from perception and benefit implications, a status change will alter the way in which employees approach their work. A previously exempt employee will now have to record their hours or punch a time clock if you move them to nonexempt. This makes the flexibility that they once had in their job a thing of the past and can have a 'big brother' effect on the psyche.

Another potential sticking point is the disparity between employees in the same position, level of responsibility or job title. You may have some exempt employees (due to tenure and/or experience) making at or above the $47,476 threshold and others who have been recently hired or promoted making several thousands of dollars less. While this wage gap may be justifiable and perfectly acceptable under the current FLSA regulations (so long as the employee earns at least $455/week), it will no longer be acceptable for an exempt employee to earn less than $913/week come December 1st. This can create a catch-22 situation. If you raise the pay of the lower earning exempt employees to meet the new threshold, do the other employees in that same job category (currently making over the threshold) expect an increase too? If you choose not to raise the pay of those below the threshold and instead reclassify them as nonexempt, does it create an 'us vs. them' mentality with those whose classification wasn't changed due to their current earning level? Who feels like they got the short end of the stick -- the supervisors now earning overtime or those who get to keep their exempt status, but are forced to pick up the extra hours to keep payroll costs down?

A change like this requires honest conversations with all employees who may be impacted BEFORE the change actually goes into effect on December 1st. Employers need to explain why this status change is occurring, how this change will impact employees' current positions (pay, benefits, tracking of time, flexibility) and whether or not affected employees are expected to continue working the hours they currently do given the fact that overtime hours will now be paid at time and a half if the employees are reclassified as nonexempt. While this isn't an easy conversation to have, you won't be the only one having it. This administrative change to the FLSA, while well-intentioned, will have sweeping effects across the country on employers and employees alike.

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

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