Do you have employees who are on salary? Do those employees ever work more than 40 hours in a week, for whatever reason? If the answer is yes to these questions, your world is about to get more complicated and probably more expensive.
Please stay with me. I need to get into the weeds, but just for a minute.
The current Department of Labor (DOL) overtime exemption threshold for “white collar” employees is anyone with a salary of at least $23,666 annually, or $455 per week. Exempt means the employer is not required to pay overtime if and when this class of employee works over 40 hours per week. This threshold applies to all businesses, regardless of size or number of employees.
Here’s the news: The DOL has announced that as of December 1, 2016, that overtime exemption threshold will essentially double, to $47,476 annually, or $913 per week. So anyone currently receiving a salary of less than this new amount will soon convert to non-exempt status, and must be paid overtime when they work more than 40 hours a week.
The reason I’m concerned about this change is because of the size of the increase. I feared this new threshold is going to catch and hurt a lot of unaware small businesses in its net. So I took this concern to my small business audience in our online poll recently and asked if they knew about the new overtime exemption changes. Alas, with less than three months before taking effect, my concerns were justified: Almost three-fourths of our respondents said they either didn’t know about the change or how it would impact them, or they knew about it and it was going to be detrimental to them. The rest, just over a fourth, said they either had determined the change would not affect them or they were prepared.
Here’s the good outcome: You might be surprised to hear me say that I think a new threshold is not unfair. In 2016, a weekly salary of $455 is too low to be expected to work overtime without additional compensation, unless it comes with a leveraged compensation factor that allows them to earn more if they work more.
But while an increase in the overtime exemption threshold is not unreasonable, doubling the threshold all at once is. And like so many government creations, the devil’s in the details. And this devil will create more problems for both employees and employers than it will solve. For example:
1. Increased recordkeeping burden: Because the doubling of the overtime exemption threshold will significantly increase the number of salaried non-exempt employees in Main Street jobs, small businesses will be burdened disproportionately with additional time and attendance record-keeping.
2. Increased payroll expense: For small businesses in a lower cost-of-living area, an immediate doubling of the exemption threshold will create an employee re-classification burden that by definition will result in increased payroll expense, perhaps prohibitively.
3. Flexibility becomes expensive: If an employer requests of a non-exempt salaried employee to work over one week and take off those hours the next, or that employee makes the same request of the employer, under the new rules, that goodwill gesture will cost the employer overtime for the week with the extra hours. A good deed should not be punished.
4. Employee hours cut: Businesses in certain industries will respond by splitting a previous 50 hour/week job into two 25 hour/week jobs in order to prevent their payroll from increasing, hurting the original employee.
5. Bad news for managers: I’m already aware of companies that will react to the new threshold by laying off some managers while increasing the responsibility of a smaller number of exempt managers, without increasing their compensation.
6. A morale downer: Being put “on salary” has been considered a professional accomplishment by generations of employees. But HR professionals tell me they’re recommending converting any employees with salaries remaining below the new threshold to hourly status. There are millions of Main Street employees whose weekly income falls between $455 and $913.
7. More lawsuits: Because of the steps some businesses will have to take to prevent these new government-imposed costs from getting out of hand, experts I’ve talked with are predicting an increase in Fair Labor Standards Act lawsuits.
When the federal government does things like doubling the overtime exemption threshold in one fell swoop, it hurts Main Street businesses disproportionately. In this case, it will create a new administrative burden, increase payroll expense without adding a penny of new productivity, and possibly hurt morale.
For four years, polls show small businesses reporting that the mandates of Obamacare disproportionately hurt them. Within a year, small businesses will regard the new DOL overtime exemption threshold increase as the little brother of Obamacare. Another example of the ham-fisted regulatory overreach of the federal government that hurts the job creators and suppresses the economy.
Write this on a rock … Buckle up, small businesses. If you like your current payroll structure, you won’t be able to keep it.