Straight Talk About Managing the Impact of New Standards for Paying Overtime

By David W. Jones, CCP, principal and director, Matthews Young — Management Consulting

Students of American history know that this change in the minimum pay threshold for exemption from overtime pay revisits the complexities of the hourly versus exempt relationship established by the Fair Labor Standards Acts (FLSA) in 1938. 

Back then, Franklin D. Roosevelt had just pushed through a federal minimum wage of $.25 an hour ($10 for a 40-hour work week) and the new FLSA regulations required a worker earn at least $30 per week as a first step towards being exempt from overtime pay.  The 2016 regulations, like those from 1938, also create a roughly 3-to-1 ratio:  $913 minimum weekly exempt pay versus $290 for a 40-hour work week at federal minimum wage.

I have observed that many in the HR community have no problem with the reasoning behind the 2016 overtime changes —that an employee who is truly doing an administrative, professional, or executive role is probably worth the $47,476 in annual salary necessary to avoid overtime.  However, I am also acutely aware of the financial and employee relations issues raised by this new regulation.

We also know that there are a number of tactics for dealing with the change—mostly in the form of alternative actions to maintain an employee’s current exempt status and minimize payroll cost increases.  Even the Department of Labor (DOL) has offered suggestions—all of which seem to either raise fixed payroll costs or increase headcount.  So, there’s not much practical help there.

While we’re all working on tactics to address the cost issue, there are a number of broader HR issues that deserve careful attention.  Here is just one example of a potential dilemma and thoughts on how to deal with it:

There are two employees in the same job. Both are exempt now, but one will become nonexempt once the regulations take effect in December.  

• This is not a necessarily a dilemma if you have priced the job competitively and each employee’s pay rate reflects their skills, experience, and performance.
• It may also have a low cost impact if the soon-to-be nonexempt employee typically works a 40-hour week with little variation.  You can continue to pay them at their current rate and even call it their salary.  You will however need to track hours worked (as defined by the DOL) and pay overtime as required.
• There is also a clear need (and opportunity) for effective communication with both employees in this situation.  Left ignored, it’s easy to see misunderstanding and unhappiness from both employees.  The newly nonexempt employee may ask: “Have I been demoted?”  “Do I lose my title of Specialist?”  “What if I work less than 40 hours in a week?  I really count on my current salary.”   The employee who remains exempt may ask: “Why should they get so much more pay for working over 40 hours while I get none?”
• And finally, the opportunity shouldn’t be missed to evaluate whether your policy on overtime authorization is effective and well-understood.  Remember that you can discipline nonexempt employees for working unauthorized overtime, but you’re still obligated to pay the overtime.  If you have a lot of new nonexempt employees, you have a real opportunity to work on policy and communications, and avoid a potentially costly problem.

This is just one example of an issue that most all employers will face.  And this is just the kind of situation where HR professionals earn their pay and their seat at the management table.  So, see past the obvious dilemma and turn it into an opportunity to deliver value to your organization.