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Overtime rule expected to be costly
[Editor's note: A federal district court has granted a preliminary injunction blocking the overtime rule from taking effect Dec. 1.]
As HR professionals wait anxiously for the release of the U.S. Department of Labor’s (DOL’s) final changes to the overtime exemptions, it’s becoming clear that the new rule will cost many employers a lot of money. But the revised standard also will create an opportunity for HR to correct some past mistakes.
Employers will spend $592.7 million to comply with the new rule, the DOL estimated, saying that each of the 7.4 million affected establishments will need one hour to get up to speed on the changes. The department calculated that it will cost $254.5 million for businesses to become familiar with the regulation; $160.1 million to make necessary adjustments; and $178.1 million in managerial costs.
For more overtime compliance news, tips and tools, check out the SHRM resources provided below:
In addition, the net transfer from employers to workers will be $1.48 billion, the DOL estimated, with $1.39 billion of that resulting in more overtime compensation or increased salaries, Robinson said.
However, there is a silver lining for employers. The rule provides the opportunity to reclassify workers who have long been misclassified, since reclassification without a reason for it, such as a new rule, can raise eyebrows, said Andrew Burnside, an attorney with Ogletree Deakins in New Orleans, speaking at the firm’s Workplace Strategies Conference in Chicago last week.
That said, the rule is expected to raise numerous challenges when some workers get pay raises to qualify for the new exempt salary level while other workers are reclassified as hourly employees.
One college, Virginia Wesleyan in Norfolk, Va., has estimated that the overtime rule would result in total increased expenses of approximately $712,845,
the Huffington Post reports. Its salary obligations would rise $657,000, not including the additional outlays to the college’s retirement plan—an additional $55,845 contributed annually to the retirement plan due to the higher salaries for some employees.
Many businesses haven’t budgeted for these expenses, Robinson noted, and he said that nonprofits and local governments will be hit particularly hard because they don’t have the resources to increase salaries above the salary level threshold, so workers will have to be reclassified as nonexempt.
The final overtime rule is expected to increase salary level tests for the executive, administrative and professional exemptions, Robinson observed. He noted that the rule also may periodically increase the salary level if it is indexed to 40 percent of full-time salaried earnings or pegged to the consumer price index, a measure of inflation.
The salary threshold for the white-collar exemptions is expected to be anywhere from $47,000 to $50,440—more than twice the current annual level of $23,660. Robinson said he expects it will be at the lower amount of $47,000 to show that the department heard businesses’ complaints about the higher figure. But the amount still would be close to $50,000, he said. (The final rule raises the salary level to $47,476 and automatically increases every three years to maintain the level at the 40th percentile of full-time salaried workers in the lowest-wage Census region.)
Robinson noted that there had been some
speculation that the department might add more duties to the duties test for the white-collar exemptions. However, he noted that the department had received about 280,000 comments in response to the proposed rule as of the close of the comment period in September 2015 and didn’t think the department could expand the duties test in such a short period of time. No changes to the duties test appear in the final rule. “If I’m wrong, set up a dunking booth for me,” he joked.
The proposed rule mentioned the possibility of employers using a percentage of nondiscretionary bonuses to meet the increased minimum salary, but Robinson said he hasn’t heard anything further about that proposal.
While some employees will be bumped above the salary threshold for white-collar exemptions, at least for this year, others will be reclassified as nonexempt. Employers will have to “worry about off-the-clock work” by reclassified workers, who won’t be used to having to sign in and out, Robinson cautioned.
Opportunity for Employers
Robinson noted that factors to consider in reclassifying employees are:
Some pay provisions will not be affected, including:
However, the proposed rule increased the highly compensated employee exemption from $100,000 to the 90th percentile of earnings for full-time salaried workers, or $122,148 annually. The final rule raised the highly compensated exemption to $134,000.
Steps to Take Now
Robinson said there are a number of steps employers can take now. First, identify exempt positions where employees earn less than $50,000. Then, decide for which positions you will increase the salaries above the new salary level.
For those employees likely to be reclassified, he recommended determining:
Another consideration is whether benefits will change for workers moving from exempt to nonexempt.
After converting workers to hourly pay, employers will put restrictions on overtime work, he noted.
Options other than converting to hourly work include:
And employers’ communication plans and training should be at the ready.
The overtime rule “is not the end of the world,” Robinson concluded. “It’s changing the way we do business.”
Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him
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