On Monday, the Department of Labor sent its proposed new overtime rule to the White House Office of Management and Budget for review, the last step before the final rule is made public. According to Politico, this move came sooner than expected and means that the regulation, which proposes raising the salary limit for who is eligible for overtime pay from $23,660 per year to $50,400, could be finalized as early as next month. Politico’s labor and employment reporters surmise that the Labor Department is looking to make sure President Obama has time left in office to veto any potential resolution of disapproval from Congress. Setting aside the legitimate question of whether a rules change of this magnitude will survive the upcoming presidential election, it looks like employers will have less time to prepare for this major shift than many anticipated.
The broad outline of the change is fairly well known: While the exact numbers might change in the final draft, it’s expected that there will be a significant increase in the minimum pay threshold necessary to be considered exempt from overtime rules, and therefore that millions of American workers will become newly categorized by the government and their employers as hourly workers, eligible for overtime pay for any work they do over 40 hours per week.
The change is leaving companies scrambling not just to understand, but also to mitigate the potential financial implications of the changes. In this process, HR is in the hot seat, and will have to answer some not-so-simple questions from both management and employees:
This question is likely to come from the CFO. One of the first things HR functions have started working on in reaction to the proposed rule changes has been to estimate the potential financial damage — what’s the total compensation increase the new rules will result in? But that’s not a trivial number to calculate—while it’s easy to know how many salaried employees are paid between the current and any proposed new threshold, how many hours a week beyond 40 those employees work is often anyone’s guess, because up until now there’s been no reason to count them. But the total cost of the change depends on an accurate estimate of this number, and companies will need to figure out a way to keep track of it going forward. The cost and complexity of building a mechanism to track overtime for “white collar” professionals is another wild card.
This one is going to come from employees who are coming to grips with how you’re calculating their new hourly wage. There are many ways to calculate an hourly wage for a previously salaried employee, none of which is the obvious right answer and all of which are varyingly good or bad (financially) for the employee and the employer. Take an employee who previously earned a salary of $50,000 per year (which falls below the proposed new threshold). You might take $50,000 and divide it by 2,000 hours per year, or by 2,080 (52 weeks x 40 hours per week). Those calculations get you $25/hour and $24/hour respectively. But if the employee typically works 500 hours of overtime per year, that $50,000 salary suddenly translates into nearly $70,000 in wages. Seeking to mitigate this impact, many employers are considering calculating the new hourly wage such that when multiplied against regular plus overtime hours, the result equals or is close to the original salary. In this example, that’s about $18/hour. Did I just get a demotion?
Another strategy some organizations are considering is to raise salaries for those just under the new floor to somewhere just above it. No more overtime problem; you’re still salaried. Sounds good in theory, but unless you’re careful, it can result in employees suddenly getting paid a lot less than colleagues with similar jobs and (previously) similar salaries. People who work for you might be making more than you do, too. A lot more.
It will be tempting for organizations to scrutinize the work that happens during those overtime hours and explore the feasibility of distributing that work, when possible, to others. They may be contingent workers, contractors, or part-time employees. Any time 50 hours per week of work don’t need to be performed by the same individual, 10 of those hours can be given to someone else and the employer saves five hours’ worth of wages. But the resulting reorganization of work will in and of itself be costly, and conversations with employees who see this happening for cost reasons only won’t be easy.