Employers: Are You Ready for Expansion of Overtime Requirements?

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On March 13, President Obama directed the U.S. Department of Labor (DOL) to come up with a way to update overtime pay rules to reflect the “changing nature of the American workplace” and to make them more “in keeping with the intention of the Fair Labor Standards Act.“

The move has the potential to affect millions of employers and workers. Fortunately for employers, the revisions to existing overtime regulations will not occur overnight. It may take many months, and the changes may face legal challenges along the way. The President said he would take input from employers into consideration as new regulations are being developed. What that means is not known at this points.

Bottom line: It is probable that some employees currently ineligible for overtime pay requirements by being treated as falling within the broad “executive, administrative and professional” employee exemption category, ultimately will have to be paid more.

Of course, these employees may only have to be paid more if their employers don’t cap their weekly hours at 40. It will also depend on how the ultimate regulations are written.

Review Overtime Rule Fundamentals

If you haven’t been paying close attention to overtime pay rules lately, now is a good time to start, with support from your accounting professionals.

President Obama’s latest charge to the DOL comes on the heels of his directive raising the minimum hourly wage for employees who work for private employers under new U.S. government contracts. Those employees will be paid $10.10 per hour, up from today’s federal minimum wage of $7.25 per hour.

Did Congress Vote to Raise Wages?

As you may recall from President Obama’s recent speeches, he has been urging Congress to raise the minimum wage to $10.10 per hour. His recent move to raise the minimum wage for federal contract workers and to push for an overhaul of the overtime regulations sidestepped Congress, which has blocked most of his initiatives in this area.

However, the boundaries of general DOL descriptions of jobs that can be exempted from overtime pay are frequently subject to litigation. The article in the right-hand box offers a basic rundown on characteristics of white collar jobs that qualify for an exemption from overtime.

As explained, one of the criteria for overtime pay exemption is being paid at least $455 a week. In announcing his new directive, the President noted that some exempted employees who work long hours are actually paid less than minimum wage. Here’s the math: Based on a 40-hour week, an employee earning $455 would earn $11.38 per hour. But the hourly wage equivalent of that employee working, say, 63 hours a week would be below the federal $7.25 minimum. The President’s example might be extreme, however.

Here’s how the numbers would work for an exempt employee earning $455 a week who puts in 50 hours a week now — if he or she were suddenly eligible for overtime pay. Since the implied hourly rate for working 40 hours at $455 is $11.38, the overtime rate, 50 percent more, would be $17.07. Multiply that by 10 (the difference between 50 and 40 hours), and you increase that employee’s weekly wage by $170.70 (not counting higher payroll taxes and perhaps some employee benefits).

Paying with Cheaper Dollars

In announcing his directive to the DOL, President Obama noted that the current $455 weekly minimum wage for overtime exemption, set a decade ago in 2004, would be $561 if adjusted for inflation, or 23 percent more. That’s the minimum wage you’d be looking at if that’s the path regulators pursue.

They might also consider how California (where the minimum wage is scheduled to increase to $9 in July) deals with it. California simply sets the exemption threshold at twice the minimum wage. That means employers in California will have to pay exempt white collar workers meeting the other job duty criteria at least $720 a week, or 58 percent more than the current federal standard.

In the majority of states that don’t have a higher minimum hourly wage than the federal $7.25 level, California’s formula would set the new minimum weekly pay at $580 ($14.50 times 40), or $30,160 annually based on 52 weeks of pay. With that approach, a raise in the federal minimum wage would automatically raise the overtime pay exemption threshold.

While Republicans in Congress generally oppose raising the federal minimum wage, it is entirely possible that election-year pressures could lead to a modest increase — although not to the $10.10 that President Obama seeks.

What to Do Now

It is prudent for employers to assume minimum pay for exempt employees will be going up, one way or another, within a year or so (beyond whatever raises you were planning). The following considerations can help you prepare:

  • Review the appropriateness of exemption status given to your employees based on the federal criteria, to assure you aren’t vulnerable to a challenge, even if no regulatory changes were to occur governing overtime pay.
  • Calculate the number of hours worked by exempt employees who might not truly meet the exemption standards. If many are working significantly above 40 hours, assess what it would cost you if they successfully challenge their exempt status, both in legal costs and higher wages.
  • Estimate the added cost to your payroll if you have to raise the pay of exempt workers currently earning little more than the current $455 minimum.
  • Would you experience a significant bump in payroll costs if the $455 threshold were raised to, for example, $580 (based in the inflation-adjustment model for raising it)? Think about whether you would come out ahead by treating those employees as non-exempt instead. The implied hourly wage at $580 a week is $14.50. Recall that the hourly equivalent wage for an exempt employee working 40 hours a week today is $11.38. You would be ahead of the game simply by raising such employees’ pay to anywhere below $14.50, assuming their weekly hours are kept to 40.
  • If the manpower requirements of your business demand total output from particular exempt employees exceeding 40 hours a week, analyze whether you are better off raising their pay, or hiring more people to get the job done without crossing the 40-hour limit.

Finally, consider the bigger picture of your local labor market conditions, and the overall level of productivity and engagement of your workforce today. If their productivity is sub-optimal, focus on addressing that issue. Doing so successfully will make your employees more valuable to the business, so that any higher wages you are ultimately forced to pay will have been legitimately earned by the affected employees.