Anyone reading about the Obama administration’s Wage and Hour Division new rules about mandatory overtime pay would be excused for thinking that more than 4 million American workers would get a pay raise when the new law takes effect on Dec. 1, in time to swell paychecks for the holidays.
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The reality will be very different, however, with most employers working hard to ensure that they comply with the new rules without any meaningful impact on their wages bill. Most workers hoping for an increase in their take home pay will be disappointed.
The new rule requires that employers pay overtime to salaried workers earning less than $47,476 a year, or $913 per week. That’s roughly double the existing annual threshold of $23,660. On top of being salaried, in order to be qualify for overtime, workers earning between $47,476 and $134,004 must conduct white-collar work such as administrative tasks or managing staff.
The rules will impact workers in a variety of fields. Many staff working in restaurants, hotels and hospitality will be affected, as will workers in construction firms and retail outlets. The rules could also cause headaches at professional services firms, such as architects and accountants that hire people in entry-level roles. Companies that have significantly busy seasonal periods, such as tax preparers and department stores, could be hit hard unless they take corrective action.
While the new overtime rules were intended to increase wages by bringing the salary levels of existing rules in line with modern living standards, other changes, such as raising the minimum wage, would have had a more direct impact on pay for many workers. Rather than increasing wages, the new rules will likely only place an additional administrative burden on countless American businesses. That’s because, if given a choice, most firms will change the way they pay employees before being forced to raise wages.
Take for example the case of an entry-level employee at a medium-sized professional firm who earns less than the threshold salary and works roughly 2,400 hours annually, including about 400 hours above the typical 40-hour week. Should the employer convert those entry-level workers from salaried employees to hourly workers or keep them on salary and risk paying as much as 400 hours of overtime? Assuming overtime is paid at 1.5-times normal wages, that would increase entry-level wage costs by 30%. That’s too much for most companies to stomach.
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To avoid such dramatic cost increases, employers will find ways to keep wage costs neutral.
A few workers will benefit because it would be smart to raise the salaries of staff earning slightly less than $47,476 to above that threshold so that those employees don’t qualify for overtime.
Many other workers could find that the way they’re paid will change. Employees earning significantly less than the $47,476 might be converted into hourly employees so that the rule change is neutral to their employer’s wage bill. Those workers may lose health insurance and retirement plans unless employers extend benefits to hourly workers. Workers on a nine-hour day — eight of work and one for lunch — may find themselves paid more per hour but no longer being compensated for their lunch break.
Some companies may adopt more flexible pay structures, for example, paying some employees less in salary but adding discretionary bonuses or other incentives. Workers earning between $47,476 and $134,004 may need to be given duties that are administrative or managerial to ensure that they don’t qualify for overtime. Some employees might be given a cut to their basic pay but told to expect regular overtime, or even significant overtime, during seasonally busy time.
Getting all this right will be challenging for many companies. Such changes will have to be communicated effectively to staff to avoid negatively impacting staff morale or prompting an employee exodus. Firms with only a few dozen workers may find that the new rules could add more administrative complexity than their limited support staff can handle. Companies with large numbers of low-paid or entry-level employees may find the administrative demands require the services of consulting firms. Any software company that figures out an easy way for companies to handle the extra administrative burden could be the big winner in all of this.
Employers that get the transition right will keep their wage bill unchanged while those that fail to take action in time should start saving for that overtime bill. One thing is almost certain, however — workers hoping for more overtime pay will be disappointed.
Michael Krucker is Senior Consulting Manager with accounting and consulting firm Plante Moran’s Employee Benefits Consulting practice.