A change that’s been close to two years in the making—raising the Department of Labor (DOL)’s white collar overtime exemption threshold—is likely to be enacted soon.
Update: On November 22, a U.S. District ruled in favor of an injunction blocking the final overtime rules from being implemented on December 1, 2016. At this time, we are awaiting more information on updates to the rule and the final implementation date.
If you have implemented changes already, we recommend businesses not change any plans, pay structures, or policies that have been updated.
Here’s a quick refresher on what that change means:
* The Fair Labor Standards Act (FLSA) sets wage and overtime standards, including qualifications that exempt higher-salaried, professional, and managerial workers from overtime pay when they work more than 40 hours in a week.
* The most notable and wide-reaching of these exemptions—the white collar salary level exemption—is subject to change, which would raise the minimum salary for exempt employees from $23,600 annually to $50,440 annually.
* The change is estimated to affect around 5 million American workers.
At face value, raising the white collar exemption seems logical and beneficial, but there are potential ramifications that worry employers, especially small business owners. The DOL opened the proposed change to public comments over the summer, which quickly showed how much concern owners, executives, and payroll professionals have: the Department received over 250,000 individual pieces of feedback on the proposed rule.
Let’s take a look at some of the pros and cons of this new legislation.
An Old Rule Needs Updating
On one hand, increasing the exemption salary level is broadly beneficial
and even common sense. The initial white collar exemption level was set
in 1975 and hasn’t been changed since. Forty years’ worth of inflation
has put a $23,600 per year salary below the poverty line (the poverty
line for a family of four was $24,008 in 2015) in today’s society,
whereas it used to place someone in the upper 38 percent of workers in
Also falling under the “common sense” approach, one of the stipulations of the DOL’s proposed increase is for the white-collar exemption salary to be tethered to the poverty line, which will more easily facilitate future increases or alterations.
Women and Minorities Could Benefit
More than just updating the overtime threshold for modern standards, the
DOL’s proposed rule means women and minorities in the workplace stand to
receive a lot of the benefit from this change.
The gender wage gap puts a lot of women in middle management firmly in the zone that would be covered by the salary exemption increase. On average in 2014, female managers earned $981 per week compared to the $1,346 weekly salary earned by men.
The proposed rule also addresses the gap in median income experienced by black and Hispanic Americans. In 2013, white Americans reported a median income of $55,257 annually, significantly more than the $40,963 average for Hispanic and black Americans’ median of $34,598.
Could Promote Better Company Behavior
The proposed change could serve as detriment to some larger companies, who may be cutting corners when it comes to paying employees for overtime.
Could Be Rough for Small Businesses
For small businesses with fewer employees and locations, overtime can be costly, especially when there may be just a few vital managers or workers whose occasionally heavy workweeks are both expected and necessary. This could either lead to tighter budgets for those businesses or unexpected layoffs of valuable employees no longer over the exemption threshold.
Rural Businesses May Suffer
Smaller companies based in rural areas have this issue uniquely compounded, as salaries in the $30,000 to $49,000 range can represent a comfortable income in small-town America. Having to pay overtime in those areas of the country can potentially cripple a business’ ability to operate and grow.
Increased Litigation and Disputes
Another fear applies to businesses of any size: an uptick in the already-increasing trend of lawsuits being filed over wages and hours. As these types of litigation often involve recently released employees and their former employers, more concerns abound for small to mid-sized businesses. Those who may choose to cull their workforce in order to help the bottom line and meet FLSA compliance regarding the new overtime rules could lose any financial savings to court costs and representation.
As with just about any sort of economic edict of federal origin, there are a lot of intricacies involved in raising the white collar overtime exemption threshold. And, things may change again before the rule becomes final sometime this year. Keep abreast with updates and news in Paycor’s Resource Center and assess your company’s readiness for these changes with our 7-Step Guide to compliance.
This content is for educational purposes only and is not intended to serve as legal advice.
Sources: U.S. Department of Labor, University of Wisconsin-Madison Institute for Poverty Research, U.S. Bureau of Labor Statistics, Wall Street Journal
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