Update: On Nov. 22, a federal judge granted a nationwide preliminary injunction against the Department of Labor’s new overtime rule, which means that it will not go into effect on Dec. 1 as scheduled, and as discussed in this article. For more information, go here.
The Fair Labor Standards Act (FLSA) requires that employees be paid at least the federal minimum wage for all hours worked, and that they receive overtime pay at time and one-half for all hours worked over 40 hours.
This protection extends to most workers, with some exceptions. Effective Dec. 1, 2016, FLSA changes one exception by increasing the minimum salary earned by employees to be exempt from overtime pay.
Essentially, salaried workers earning less than $47,476 a year and working over 40 hours a week may be eligible for overtime pay. The prior level of $23,660 was updated in 2004. (Future salary adjustments for inflation will be made on a three-year cycle.)
The Department of Labor estimates that this new revision will impact over 4.2 million workers and potentially result in $12 billion being transferred from owners to employees over the next decade. The annual direct cost to employers for compliance and managerial costs is estimated at $295 million annually. Generally, the law impacts companies with over $500,000 gross sales or those doing interstate commerce.
FLSA provides two classifications for workers: exempt and non-exempt. Three tests are used to determine being exempt from overtime:
• must be paid on a salary basis and not an hourly basis;
• salary must be over $913 per week (equivalent to $47,476 annually); and,
• the primary job duties must be associated with a “standard duties test” for executive, administrative, professional, outside sales, and computer employees. Often referred to as the “white collar” exemption, it presumes these kinds of workers earn salaries well above the minimum wage, enjoy greater fringe benefits, and have greater job security and better opportunities for advancement than those workers entitled to overtime pay. The duties of the employee are more important than titles for classification purposes, so a company cannot escape paying overtime by merely changing job titles.
Companies must determine how many of their employees fall into this potential overtime classification.
In most school bus contracting operations, the drivers and mechanics are paid an hourly rate and receive overtime pay for working in excess of 40 hours. But certain salaried fleet supervisory or managerial positions may exceed 40 hours a week during the busiest times of the year.
Since the weekly rate has increased from $455 per week (equal to $23,660 annually) to $913 per week, companies need to identify those workers earning under $913 per week who may work more than 40 hours weekly in order to determine their exposure to the revised regulations.
Here’s an example: A fleet supervisor earns $38,000 a year ($731 per week) on a salary basis. Since the salary falls under the $913 threshold, this employee is eligible for overtime if he or she works more than 40 hours per week. Note that the “duties” test is irrelevant in this situation since the salary test was not passed.
Options for impacted companies
There are many options for addressing the new salary changes. The Department of Labor does not mandate or recommend any changes to meet this new law, but the department does provide some ideas for dealing with the changes. Nonetheless, companies need to capture working hours for salaried personnel in existing systems or establish new procedures.
Here are six options for addressing the new overtime regulations.
1. Raise salaries: Assume a supervisor earns $46,800 a year working 40 hours each week, but during 10 weeks this person is extremely busy and works 50 hours a week. The base pay is $900 per week ($46,800/52) or $22.50 per hour under normal circumstances. The overtime rate is $33.75 per hour (time and one-half) and results in $3,375 in additional compensation paid in overtime benefits. For the company, the better option may be to raise the salary to above $47,476 to maintain the supervisor’s administrative exemption.
2. Straight time with overtime add-on: Employers have the option of paying a straight salary for more than 40 hours per week. Example: A supervisor earning a $44,200 salary for a 50-hour workweek is really being paid $17 per hour ($850 weekly pay/50 hours). This includes no overtime, so if the employee works 50 hours, then the company pays the half-time overtime premium at the rate of $8.50 ($17/2) per overtime hour. Note: Overtime-eligible employees may still be paid a salary and need not be paid an hourly rate, but they are compensated on the hourly rate basis.
3. Reorganize workloads: Another option is to reallocate job duties from an overtime-eligible employee to an exempt employee, or try to rework schedules to minimize overtime. Providing comp time to offset overtime might work, but it must be in the same work week.
4. Adjust wages: Employers can adjust a salary so that the employee’s earnings remain the same. Example: A person works 45 hours per week and earns $37,000 per year ($711.54 per week). A company could pay the worker $15 an hour and the overtime rate for the five hours of overtime. This would result in a total pay package of $712.50 per week. Alternatively, the adjustment can be a $600 weekly salary for 40 hours and overtime pay for the extra hours, with the same results. Obviously, this requires managerial skill to adjust employee pay without sending an inappropriate message. Plus, there may be collective bargaining issues to address.
5. Bonus or catch-up payments: Employers can use quarterly (the key measurement period in FLSA) nondiscretionary bonuses or catch-up payments for up to 10% of salary to adjust compensation to reach the $913 threshold for being exempt from overtime pay. Thus, an employee working overtime but close to the $913 weekly rate may be a good candidate for a catch-up payment to adjust his or her salary over the $913 level and eliminate overtime pay. These may be processed in the first pay of the next quarter.
6. Outsource or automate: A final option may be to outsource certain work to independent contractors, or perhaps the added overtime expense might make it more attractive to invest in automating certain procedures, making the employees more efficient.
For school bus contractors, paying salaried employees overtime will have a significant impact. However, with proper planning and employment law counsel, the impact can be controlled to minimize the effect on the bottom line.
Bruce A. Leauby is an associate professor of accounting at La Salle University’s School of Business in Philadelphia.