Your cost of labor just got higher!
If there was a doubt in anyone’s mind about the complexity of overtime rules, the lawsuit against the Department of Labor, the guardian of the overtime rulebook, should put that to rest. Millions of dollars are lost in litigations and payroll leakage by businesses like yours each year, simply because they aren’t able to handle overtime compliance. This only gets more complicated come December 1st, when the impending change to white-collar exemptions will affect close to 64 percent of employers, and upwards of four million white-collar employees.
You may think your business is safe because you don’t have any hourly workers, but think again — this change could still apply to you!
Your business has two main options for dealing with the new overtime rule — you can either choose to increase the salary of your employees above the new threshold ($47,476 per year), or reclassify them as non-exempt and manage overtime costs as they occur. Let’s take a look at some factors to consider for each approach:
1. Increasing salaries above the new threshold
This move works best when currently exempt employees’ salaries are close to the new threshold, so businesses can choose to slightly increase salaries to avoid the complexity of having non-exempt workers. The other pro — an increased salary and continued exempt/salaried status can seriously boost employee morale. Below are a few things to consider before choosing this option:
Will overtime pay cost more than a salary increase?
You need to thoroughly analyze the nature of the work done by your currently exempt employees, and estimate their weekly hours (which may be difficult if you don’t have attendance records) to determine whether this option is in your best interest. It was for Walmart, which recently made the executive decision to raise entry-level manager salaries from $45K to $48.5K. So how do you come up with this salary number?
Let’s say you have 100 entry-level managers who are getting paid close to $40K a year. If, on average, they work about 45 hours a week, you’ll end up spending about $7.5K per manager, regardless of whether you decide to pay them overtime or reclassify them. With relatively similar costs for either option, it’s a fairly easy decision to push salaries over the threshold to maintain exempt status for your employees, and protect your business from overtime litigation.
But what if these entry level managers are paid closer to $38K a year? In this case, it costs you about $7K more per manager to pay overtime costs, but pushing their salary to $47K will cost you $9K. That cost alone can add up to nearly $200K, not including potential additional costs (such as retirement benefits) incurred by this salary increase. Even simple analyses like these can help you glean a clearer picture of the true costs of different options.
Can you keep up with future threshold increases?
HR and payroll leaders should understand that deciding to increase salaries sets a precedent for their workforce. The automatic threshold increase, which happens every three years, will further boost the exempt salary threshold starting in 2020. The new 2020 salary threshold is $51K — are you willing to boost salaries again in three years, or is overtime pay ultimately less costly? Consider these future changes before committing to a salary increase.
Are you at risk for pay compression?
If salary levels are automatically increased for employees affected by new overtime laws without considering or including raises for those not subject to the same law, then you put your business at risk for pay compression. An option to combat this is to implement blanket salary increases for affected departments, but this might prove too costly for your business. Before implementing a salary increase for those affected by the new rules, evaluate salaries of more senior employees in the same department, and determine how much pay compression will occur.
2. Changing worker status to non-exempt
If you opt to keep employees at their current salary levels (lower than the new threshold) instead of increasing salaries, then you need to ensure that you have proper processes in place to accurately track hours and overtime pay. This can presents its own unique challenges:
How does status change affect employee morale?
People tend to think of being a salaried employee as a kind of status symbol — a step above the hourly worker. Because of this, HR leaders need to be particularly careful when communicating changes with the new hourly employees. Hourly work should be presented not as a demotion, but as an opportunity both for employers to ensure the pay employees their fair share, and for employees to earn more for additional hours worked. Framing this change in a positive light can make all the difference, so make sure your HR department is prepared to address employee questions and concerns in a way that reflects this.
Do you have adequate time-tracking processes?
It can be a challenge to get employees to consistently and accurately submit timekeeping materials, which can cause backlogs, incur hidden costs, and even leave your business susceptible to wage and hour litigation. Businesses need to get ahead of this by speaking to the importance of tracking hours worked, and educating employees on company policies for time and attendance. If your business doesn’t have these already, you should form company policies that also address managing off-the-clock work, remote work and on-call work.
How many hours are employees really working?
Formerly-exempt employees are probably used to managing their own schedule, and may be putting in long work hours without additional pay. With their changed status, businesses need complete and real-time visibility into how much time is being spent working. This way, supervisors can decide if their employees are being overworked, if overtime is critical, or if they should ask employees to clock-out. Again, such visibility isn’t possible if you don’t have attendance information.
Over the years, there have been many conversations on whether or not businesses should track hours for their entire workforce, both non-exempt and exempt. The challenge posed by the new overtime rules underscores the need for accurate data on your entire workforce, regardless of classification. With this information, you can make decisions like this with confidence, manage employee productivity, and balance policy compliance with profitability.