A report from WorldatWork released this week predicts the threshold for overtime exemption could rise as high as $70,966 by 2020 as changes to overtime rules under the Fair Labor Standards Act decrease the number of exempt employees.
That’s almost $20,000 higher than the Department of Labor estimated in its recent final rule.
The discrepancy lies in the DOL’s underestimation of how many currently exempt full-time employees will be reclassified as hourly employees, according to Cara Woodson Welch, vice president of external affairs and practice leadership at WorldatWork. If these employees are reclassified, the size of the 40th percentile of full-time salaries in the lowest income region could continue to shrink with every three years’ automatic update and lead to misleadingly high looking salaries. If WorldatWork’s estimate is correct, only 14.4% of the workforce would still be exempt by 2032.
Employers will be faced with a number of choices on how to classify employees and the benefits employees will receive under these various classifications. The new rule raises the threshold to $47,476/year, up from $23,600/year. It will take effect Dec. 1, 2016.
The salary threshold has not changed since 2004. And while many agreed it needed another update, the increase may have been too much, too fast.
“In 2004 I didn’t see a lot of issues because it wasn’t as huge of a jump,” says Leonard Sanicola, a spokesperson specializing in benefits for WorldatWork. “I think now we’ll see more of the benefits being impacted.”
Some companies and organizations provide different benefits to different classifications of workers. So a worker who had previously been classified as a full-time, exempt employee may be reclassified as an hourly employee to save overtime costs – and lose benefits in the process.
The impact will vary. Some employees may lose vacation time, while those with a 401(k) or life insurance could see lower employer contributions.
“But I don’t think that is as big of an issue as employee morale,” Sanicola says.
Employees who viewed overtime exemption as a status symbol they’d worked up to may feel slighted if reassigned to hourly wages.
It also allows for less flexibility. Those accustomed to scheduling a doctor’s appointment or going to their child’s recital midday without worrying about hurting their income will now have to make up and account for every hour worked.
Full-time employees who earn just below the threshold may be given a raise just high enough to push them back into exempt. Part-time employees face the same threshold as full-time and hourly peers. It is not clear the impact this change will have on them, though some are advocating for two different thresholds.
Sanicola says the predictor of how a company will adapt has less to do with its size and more to do with its industry. Small tech startups with highly educated employees are less likely to have people under the threshold, and will therefore not be heavily impacted. Meanwhile, large hotel and catering companies will be hit harder.
“It’s going to be unique at every organization,” says Sanicola. “Maybe they’ll standardize benefits, or grandfather people in. But then you have people working side by side with different benefits. Employers are going to have to list out the possible actions and see what impacts employee relations and costs most.”
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