On May 18, President Obama announced an update to the U.S. Department of Labor’s (DOL) overtime regulations. Once the changes go into effect on Dec. 1, they will affect an estimated 4 million workers in the United States. Here are some questions and answers about the regulations.
Who will this new rule affect?
This affects both hourly and salaried workers if their pay is less than or equal to $913 per week. This is a dramatic rise in the threshold, as the prior level was $455 per week.
What are the exemptions to the rule?
In order to be exempt from this rule you must:
1. Make more than the annual threshold amount of $47,476, or $913 weekly
2. Undergo a duties test to determine whether the work you do is exempt from the overtime rule. Certain “learned professions” (physicians, lawyers, accountants, etc.) are classified as exempt. Executive, administrative, professional, outside sales and certain computer employees are also exempt. Your employer will determine into which category your job fits.
How will employers adapt to this new rule?
There are a variety of methods that employers might use:
• They may determine an employee’s new pay by estimating the expected total hours that are factored into their current salary and then switching them from salary to hourly. These employees now must work all of the expected hours for their position to have the same take-home pay they were assured under the salary approach.
• Some employers will scrutinize job responsibilities and attempt to classify more employees into exempt categories to avoid paying overtime.
• Other businesses might revise their staffing – for instance, they might cut the hours of their two managers and hire a third to avoid paying any overtime. This approach might especially affect entry-level part-time workers whose hours may be more tightly managed to ensure they don’t reach 40 hours in a week.
• Another possibility is that if an employee is close to the $47,476 threshold, the employer may decide to raise the employee’s pay over the threshold and look for other places to cut costs.
An unintended consequence of these changes is that employers may be less willing to offer employees flexibility with their schedules. For instance, a salaried administrative professional who met the prior salary threshold may have been given the opportunity to handle personal matters during work hours with the expectation that any time used would be made up the following week. Due to the jump in the threshold, this employee may no longer be allowed to do this since overtime would result in the “make-up” week.
What are some impacts this might have on companies and their employees?
Professional development could suffer. Employers may not be so willing to provide their workers opportunities for networking or personal development since this additional time spent outside the office qualifies as overtime. A training class after work that provides education to an employee could be taken off the table if it conflicts with the 40-hour work week. This business might cut costs but would be losing out on having a more valuable employee.
The projected cost to U.S. employers is in the billions. Some argue that the threshold could have been increased slowly over a longer time, giving employers a chance to adjust their finances. Also, with the cost of living varying widely from state to state, trying to apply the same dollar amount across all states is difficult.
How will it affect U.S. consumers?
It depends on the nature of the products or services. Margins are tight in a grocery store business, for example, and employers can’t really adjust pricing on those products to make up for spending more on pay. However, a plumber could pass along the costs he’s incurring to the client, computer terminals at restaurants could replace wait staff, etc. The flexibility of the business owner will determine the need to raise prices and pass along costs to the consumer.
In January 2020, the pay threshold will rise to a DOL-estimated $50,000 to $51,000, and employers will yet again have to determine how to make up for incurring the incremental cost. Businesses will need to learn to be flexible and become savvier in planning for the future, all while not pushing away their employees and consumers.
Kelly Hein Jr. is partner-in-charge of the tax department at Fort Worth accounting firm of Rylander, Clay & Opitz, LLP and is president-elect of the Fort Worth Chapter of the Texas Society of Certified Public Accountants.
At RCO he is responsible for managing the Tax and General Services Department and maintains responsibility for tax planning, research and compliance for business, estate, trust and individual clients, as well as preparation of business valuations. His areas of expertise include estate planning, fiduciary taxation, organizational consulting, business valuation and litigation support.