Submitted by: Dennis Shrenk, Senior Compensation Consultant, PROXUS
Last month, the Department of Labor issued the much-anticipated revisions to the Fair Labor Standards Act overtime regulations.
These are the first significant changes made to the law since 2004 and represent a profound change in how employers determine which employees are exempt and which are non-exempt and entitled to overtime pay.
Final Overtime Rule Provisions
Effective December 1, 2016:
- The Standard Salary level will increase to $913 per week, or $47,476 per year
- The Highly Compensated Employee Salary Level will increase to $134,004 per year
- These salary levels will automatically update every three years, beginning January 1, 2020
Additionally, the Final Rule will allow employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new standard salary level.
Key Considerations to Make
Any employee earning below the new Standard Salary level will be considered non-exempt and entitled to overtime pay, regardless of their title or duties. Employers with staff earning below this new threshold must either make these employees eligible for overtime, or increase their salary to meet the new Standard Salary level.
However, both of these actions can have far-reaching implications on your workforce and business:
- Internal Equity
While employers can increase the salaries of employees to meet the new salary level, they should also consider those employees who are already earning above the threshold. Treating groups of employees differently, particularly those within the same job function or level, can cause significant employee relations disputes.
Additionally, if an employer increases the salaries of employees to meet the new salary level, they could now have a number of employees paid at the same rate. This causes “salary compression,” which is when employees within the same job or level are earning similar pay. Salary compression can dramatically lower employee morale and eliminate justified differences in employee pay based on performance and experience.
- External Equity
Employers must also consider how the new salary threshold will affect their company’s competitive position in the labor market. Increasing employees’ salaries may mean you are now overpaying for a job when compared to the marketplace. This may be particularly true for employees with little or no experience, and new graduates.
If not handled carefully and precisely, overpaying employees can stifle employee development, discourage beneficial turnover, and create legal risks for your company.
While increasing employees’ pay to meet the new threshold can present a significant financial burden for employers, so too can paying those same employees time and a half for any hours worked over 40. Employers will need to review which positions are susceptible to reclassification, and determine which course of action makes the