September 2017 Update: According to Reuters.com, a Texas federal judge struck down the new overtime rule. Companies do not need to make any changes to how they pay overtime to their employees.
November 2016 Update: According to a recent Forbes article, “a federal judge in Texas has issued a nationwide junction blocking the [new overtime rule.] The injunction halts enforcement of the rule until the government can win a countermanding order from an appeals court.”
Employers are voicing concerns. How can companies like small businesses and non-profits sustain such a rise in labor costs? And won’t there be consequences for workplace culture and employee morale?
Here’s a guide to help you understand the new overtime laws a bit better:
Getting to know the basics
In 1975, the Fair Labor Standard Act (FLSA) required employers to pay almost two out of three employees overtime. This figure decreased over the years to around eleven percent. Obama’s new overtime law, which has been debated since the summer of 2015, aims to fix this.
Before the new overtime law, white collar employees had to be earning a maximum of $455 per 40-hour week to be non exempt (and therefore eligible for overtime pay). Now the salary threshold has doubled to $913 (or $47,476 per year). So, many more people could be eligible for overtime. The new law also reclassifies the cut-off for “highly compensated employees,” (HCE) from those who earn above 100,000 a year to those who earn more than $134,000. HCE are exempt from overtime pay if they meet certain requirements.
Of course, there are exceptions. Businesses that make less than $500,000 in revenue aren’t covered by FLSA rules, so they don’t have to pay overtime. Some businesses, like hospitals and schools, have to pay overtime regardless of revenue.
A quick look around the globe
Some see this policy as overly generous. Others say it’s still a long way from the standard of other countries. So, what’s happening outside the US?
UK overtime law doesn’t oblige employers to pay anything for extra hours. But employees can’t be made to work more than 48 hours per week. Everyone must get paid at least minimum wage, for all the hours they work. Employers can offer time off in lieu of overtime.
Other countries have more generous overtime laws. Mexico’s law is interesting; overtime compensation is double an employee’s normal pay, and triple if they work overtime on a national holiday.
According to Russian law, employers can ask employees to work overtime in specific instances and for a maximum of four hours over any two consecutive days (up to a maximum of 120 hours per year). Overtime pay is at least 1.5 or 2 times normal wage.
France’s overtime laws require employers to pay an additional 25% of an employee’s normal wage for the first eight hours of overtime (and 50% for every hour beyond that). But new French labor laws might change this; an issue which has sparked much debate and various demonstrations since spring 2016.
How are US employers affected by the new overtime law?
It’s natural for employers to be unhappy about laws that up their costs. In the retail and restaurant industries alone, projected costs may amount to nine billion dollars a year. Employers will also have to review current HR policies (like timekeeping).
What can businesses do?
Usually, added costs are passed on to customers. But, some employers are thinking about other ways to reduce their costs. They could raise salaries so employees can reach exempt status once again. Or they could lower salaries to make up for overtime pay. Are these options worth it, in the long term?
Probably not. Raising salaries just above the threshold is a ploy unlikely to inspire employees’ respect. Plus, this money will likely come from cutting other salaries or benefits (excluding a 10% bonus the new law allows) which employees are never big fans of. Employee engagement and productivity may suffer as a consequence.
Of course, employers could hire part-time employees to take on the extra hours, capping the working week of full-time employees.
Is paying overtime any good for business?
Added labor costs are a pain. But, businesses can pull through by making their processes more efficient and cutting redundant costs.
Imagine if there were no laws for overtime at all. Would that be good for business? Theoretically, employees could work as much as possible without extra pay for going above and beyond. This doesn’t seem like a healthy employment relationship that could boost productivity or long-term gains.
At a time when employee engagement is the holy grail for employers, complaining about having to pay a low-salaried supervisor for their work might send a bad message.
Need an additional argument? Retail, an industry heavily impacted by the new rule, can benefit from it too. Retail workers are retail customers too – if everyone is better paid, they’re likely to buy more retail products. Extra costs are a burden, but they could coincide with a rise in revenue.
How are employees affected?
Five million previously exempt employees (or many more, according to the Economic Policy Institute) can now get paid more. This should be good news for them. But, they may actually experience negative consequences.
If employers cut salaries or raise them just above the legal maximum, employees mightn’t profit much. And if employers cut back overtime, non-exempt employees may burn out trying to deal with increased workloads within normal working hours. There’s also fear that employers will eliminate some positions that require frequent overtime by automating work, or passing it to exempt employees.
Stricter timekeeping is also a pain. Nobody likes other people monitoring when they clock in and out. But this is something people can get used to, especially if they see their income rise.
There’s been some speculation that newly non-exempt employees will feel demoted and under-appreciated. Counting work hours is a normal practice for blue-collar workers. But, no matter how much prestige an employee places on their exempt status, they’re more likely to be satisfied about getting paid more. Imagine a retail store manager, making $35,000 per year working 60-hour weeks. Having to monitor their hours to get paid more isn’t likely to make them complain.
And what about public opinion?
Eighty percent of American citizens support extended overtime rules. Businesses may consider increased costs a headache but public opinion should make them reconsider their resistance to the new overtime law. After all, “the customer is always right” – catering to what 80% of the public wants is rarely a bad business move.
So where should you start?
US businesses have until December 1st 2016 to adjust to new overtime regulations. Some employers may try to get around the law. But, in the long term, it’s probably better to adjust to it and pay the new overtime rates.
Here are some actions you can take to make the transition to the new overtime law easier for you and clearer for your employees:
1. Seek legal assistance
Ever since the new overtime law was officially announced, there have been tons of articles explaining its nuts and bolts. But, a qualified lawyer can explain the rule in more detail and give useful advice on how to deal with its consequences.
2. Re-classify employees
Almost 11% of employees may be misclassified. Overtime laws set guidelines for who can be exempt. Companies should make sure all of their employees are correctly classified as exempt or non-exempt.
3. Craft clear company policies
A carefully crafted overtime policy, along with an attendance policy, is a must. Companies that already have these kinds of policies should update them as soon as possible.
What should an overtime policy include?
- Define employee classifications. If you reclassify employees, let them know why you reclassified them.
- Explain terminology. Employees should know what being classified as exempt/non exempt means. They should also understand other concepts like ‘standard working hours.’
- Outline company overtime rules. Employees should know why and when they can be asked to work overtime. Is overtime mandatory and frequent or optional and occasional? Brief employees on your company’s legal obligations to encourage transparency.
- Establish and communicate procedures. Should employees and supervisors sign written agreements when overtime is needed? Communicate all your procedures for recording and paying overtime.
- Be clear on employees’ obligations. For example, tell employees how you’ll compensate voluntary overtime. Ask them to pay close attention to their timekeeping and set out rules to avoid excessive overtime.
- Use the right technology. You can track hours and calculate overtime pay easily with the help of technology. ERP (Enterprise Resource Planning) systems and timekeeping software can standardize this process and shorten your adjustment period.
Legislative changes of this scale can be disruptive. Especially for HR departments who have to rethink policies and procedures. But, the quicker companies learn to adapt, the less likely they are to suffer negative consequences.