As you are certainly aware, new overtime rules go into effect on December 1st of this year. For a summary of the changes, click here.
In brief, nearly all employees who earn below $47,476 will now be entitled to overtime and up to 10% of incentive payments can be credited towards this new salary threshold. While the regulations are reasonably simple, the cost implications and myriad of implementation considerations quickly become very complex. Here are the top 5 questions that every CFO should be asking:
1) Is this just an HR issue?
The short answer is no. Historically, overtime compliance fell within the purview of HR. The laws had a lot of grey area and HR, often in conjunction with legal counsel, was responsible for determining which employees were entitled to overtime and which were exempt from the overtime requirements. As you will see below, implementing the new regulations requires extensive calculations and computations of “what-if” scenarios. These financial analysis skills are typically much stronger in the CFO’s office than in HR. In fact, we have already seen a number of CFOs review options with HR relegated to a supporting role.
2) What are our options and associated costs?
Too many employers are simply deciding on one of the DOL’s simplistic implementation scenarios and then calculating the associated costs. However, best practices indicate that employers should evaluate all of their options before choosing the best path. Analyses that could be undertaken include:
- Zero-cost implementation strategy: There are ways to implement the new regulations without increasing costs (or decreasing productive employee hours). While a zero-cost implementation may not be a good cultural fit in some organizations, it represents an important baseline from which decisions can be made.
- Increase all employees to the new minimum: If a zero cost approach is inconsistent with your organizational culture, what adjustments need to be made to balance the financial impact with cultural and employee morale considerations? Again, this requires an analysis of all possible scenarios rather than a single “Ready, Fire, Aim” plan.
3) What is the minimum we can spend that is consistent with our culture?
This is where the new regulations get scary. Specifically, the $47,476 salary threshold is scheduled to adjust every three years. While, this may not seem to be a big concern, the DOL’s indexing methodology may result in nearly exponential growth to the salary threshold. According to our calculations, the worst case scenario would make all employees under approximately $70,000 overtime eligible in three years. When projected out 15 years, the new salary threshold may exceed a quarter of a million dollars in salary! Accordingly, CFOs must think beyond the immediate costs and evaluating the possible financial and demographic impacts over time.
4) What are the pros and cons of each option and addressing pay compression?
When compensation systems are properly designed, differences in pay levels should be linked to market competitive pay, employee performance, experience and value to the organization. Any time an organization artificially changes pay levels in response to regulations, the relationships of pay levels among employees can be negatively impacted. Will we have two employees in the same job with one eligible for overtime and the other not eligible? Will we inadvertently communicate pay levels to employees as we implement changes? If we increase pay for some employees to $47,476, might we compress pay between a new employee and a longer tenure employee? If we begin to address compression, where do we draw the line?
5) If we limit overtime, what will we lose in employee hours?
As more employees become overtime eligible, many in HR are revisiting policies to limit overtime. This is certainly an important step to prepare for the December 1st deadline. More importantly, CFOs must evaluate options to overcome the decrease in productivity associated with reduced hours and limited flexibility. How many productive hours will we lose? What is the cost/benefit of hiring more employees versus paying more overtime?
We created the CBIZ FLSA Optomizer ToolSM to bridge the gap between the questions CFOs are asking and the “Ready, Fire, Aim” approach. Specifically, this inexpensive tool evaluates numerous short- and long-term implementation scenarios including employee by employee cost, lost productivity, and demographic shifts customized based on each client’s specific employee data.
For more information, please reach out to your local CBIZ representative or Ed Rataj at 314-692-5884 or [email protected].
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Questions for CFOs to ask about the new overtime regulations.