The U.S. Department of Labor (DOL) recently released a new rule that requires anyone who makes less than $47,476 annually to receive overtime pay. When a colleague suggested I consider this topic for my blog, I was reluctant. I’m not an expert on wage and hour issues. We have many people much more qualified than I to discuss the impact of the new rule. My second thought was that I don’t want to invite a DOL audit and all that comes with it. Yet here I am writing about it.
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Here’s why: The same day the new rule was announced, I was standing before a large group of our employees at one of our locations. And as I looked out at the people who work so hard on behalf of our company, my thoughts went to those exempt employees who currently make a salary that is less than $47,476. How are they going to react when they are told they will have to punch a clock?
It is estimated that 4.2 million additional workers will now have to keep track of their hours. Some of those people work at our company. We will now have to communicate to those who fall below the new threshold that they will need to punch in and out every day. All the freedom they were allowed as an exempt employee will be taken away. Need to run an errand or leave for a doctor’s appointment? You now need to clock out. Sorry, but I don’t have any choice in the matter.
I know a business owner who faced this dilemma a number of years ago. Some of his technology people were paid on an hourly basis as nonexempt employees. He felt it was the right and fair thing to do since they were called on to work at odd hours when the company was facing technology difficulties and often worked more than 40 hours in a week. But the employees didn’t like being paid hourly—they wanted to be salaried. So this owner agreed to pay them a salary. He calculated their average pay, including the overtime pay they had received, and made them all salaried workers. The employees made the same amount of pay for the work they did. The company paid the same for the work it received. Everyone was happy.
Everyone, that is, except the auditor from the state’s wage and hour division. No, the auditor came in and said the technology employees still needed to be paid overtime because they were nonexempt employees. It didn’t matter that they had asked to be made salaried—they still didn’t meet the tests for exemption. (Even if a computer employee earns the currently required $455 per week, or $27.63 per hour, for exemption, the employee still needs to pass the duties test to be classified as exempt.) It didn’t matter that they were being paid an amount equal to what they received when they were paid overtime. The rules wouldn’t allow it because overtime must be calculated on a weekly basis. An estimated overtime amount can’t just be factored as part of an employee’s salary as this employer had done.
The business owner, for his good-faith effort to keep his employees happy, had to pay fines and back pay. And the overtime back pay was calculated at the hourly rate implied by their new, higher salary. The business owner’s good deed ended up costing him a pretty penny.
Many believe this new rule was politically driven in an election year, and there are some who claim it equates to a pay raise for many workers. However, the DOL itself says that one of the objectives of the new policy is to spread employment by “incentivizing employers to hire more employees rather than requiring existing employees to work longer hours.” That means it won’t raise wages for current employees but instead will cause employers to hire more workers to avoid paying overtime.
But when you’re moving salaried employees to hourly, you are limiting their ability to work anything beyond 40 hours without the employer having to pay overtime. My guess is that most employers, like me, will require employees to limit themselves to 40 hours a week so we don’t end up blowing our budget paying unexpected overtime.
When I was hired for my first professional job, my salary was $17,000. It was a long time ago, but even after taking inflation into account, my entry-level salary was far below the limit set by DOL’s new rule. If I had been told that I had completed my college degree and earned my first professional job only to be paid by the hour, I would have been deflated. And if I had been told that I had to leave work after 40 hours, regardless of what I wanted, I would have been frustrated.
As I was trying to get my career off the ground, one of the ways I could distinguish myself from my coworkers was to produce more and higher-quality work. Doing so often requires outworking those around you. And it’s clearly an individual choice. If I wanted to put in the extra effort, it was my choice. I viewed it as an investment in my career. Today, I wouldn’t be allowed to do that unless my employer agreed to pay me overtime for the effort. The new overtime rule actually limits my freedom of choice.
I won’t question the motives of those who put the new rule in place. But the problem with any rule is that there are always unintended consequences. In this case:
- The new rule takes away workers’ ability to determine their own career choices when it comes to how long and how hard they want to work.
- It requires employers to spend more to ensure they’re in compliance with the new rule. The DOL estimated it will cost companies $677 million just to comply. Wouldn’t that money be better spent on compensation for workers than on compliance? Could people actually lose their jobs as companies look to find the money to cover the new cost of compliance?
- It causes many workers who took pride in being salaried and benefited from the freedoms it allowed to now punch a clock, likely resulting in a decline in morale among them.
The new overtime regulations will likely prevent the minority of employers that routinely don’t fairly compensate their employees from doing so. But like with many rules, it is going to penalize everyone else—employees and employers alike—that otherwise have been working together to mutual benefit.
“The new overtime regulations will likely prevent the minority of employers that routinely don’t fairly compensate their employees from doing so.” I don’t believe that there is a minority of employers that routinely don’t fairly compensate their employees. I believe many employers don’t fairly compensate their exempt employees.
Has the CEO of a human resources consulting firm, I have tried to not “go negative” on these new regulations. What are some of the positives? 1) Employers will be motivated to design jobs that are 40 hours so that workers don’t have to work overtime. Employees potentially will be more productive because they aren’t “working like dogs” and are tired and stressed all the time. 2) Employers who have been paying Assistant Managers $23,660 for 60 hours of work will have to reorganize their operations and pay employees fairly. 3) Employers who have been doing the FLSA incorrectly and have potential liability have the opportunity to “clean up” their operations. Overall, there are opportunities to review the entire business model and specifically the organizational design. Maybe just maybe quality of life will improve for all. Just saying.
At my first “professional” job I made around $15K, so sounds as though we might be in a similar age group. Today, I am salaried, but I still clock in and out every day. Have done for 12 years. Everybody at my company does — vice presidents and warehouse stockers and everybody in between. Clocking in and out means the company knows how many house we’re working, even if those hours aren’t used to calculate the pay of those of us earning a salary. It’s one way of making sure nobody’s overworked. (I work for a good company that understands people need time away to recharge their batteries. Makes us more productive and creative in the long run.)
So far, it doesn’t seem to have damaged our morale all that much. And people still have the “freedom” to take time off for doctor visits and school meetings. The new law doesn’t mean that people have to convert to hourly if they make less than the threshold. They can still be paid a salary and have all the same “freedoms” that they do now — it’s just that if they work more than 40 hours in a week, the company will now have to reward that hard work with additional pay.
I clocked in and out at previous “professional level” jobs, as well. Used to work as a consultant. Being paid by the hour isn’t necessarily “demeaning” or demoralizing. Especially when you’re pulling down six figures in an “hourly” job. 🙂
You are aware, of course, that the current threshold for exemption (just under $24K) is today below the poverty line for a family of four? It was good money back in 2004 when that threshold was set, but now? Not so much. Do you really think poverty level wages are appropriate for what is commonly termed a “white collar” job?
Employers have for years reaped the benefits of underpaying employees, threatening workers to put in draconian hours or risk being laid off, and now they’re crying because they’re either going to have to hire more people or start paying some workers the overtime they’ve deserved all along. Sorry, I don’t have much sympathy for them. If I thought they would take the money “saved” by not implementing the new threshold and give it to workers in the form of increased compensation, that would be one thing. But are you really so naive as to believe that’s what would happen? Many companies are making record profits these days, while wages have been stagnant for years. Anyone who’s been paying attention knows the “savings” would go toward the increasingly lavish bonuses and perks the executive suite award themselves. The rank-and-file would see little, if any, of these alleged “savings.”
And the idea that the “way to get ahead at work” is by burning the midnight oil for an employer who doesn’t want to pay appropriately for your time and expertise? Sorry, that notion went out with the dinosaurs. If anybody is still laboring under the delusion putting in a 60-hour week is the way to “get ahead,” they still can work those kinds of hours. They’ll probably find it easier to get a second job now — maybe pick up some new skills, explore other opportunities or get experience in a different industry. *And* they’ll be taking home a second paycheck to boot! I suspect that would be more useful, both for their career and their finances, than slaving long hours for peanuts for one employer who refuses to hire enough people to get the work done in the time allotted. And for those who would prefer to spend time with their families, that will also become an option, now that their employer can’t *require* them to put in a 60+hour week without paying the overtime. Workers will have *more* choices than before, and now they’ll get paid for *all* the hours they work.
The DOL should have increased the threshold and set up automatic cost-of-living increases years ago — if they had, perhaps now there wouldn’t be so much hand-wringing. But better late than never.