Overtime Impact from Eligibility Rule Change and Increases in Minimum Wage: Labor Costs Rise

overtimeimpact and minimum wage increases

The overtime impact from new eligibility rule and minimum wage increases are this year’s hot-button issue for small business relates to rising labor/wage costs. This is a two-fold issue for small businesses and are a result of the Obama Administration’s issue of the new overtime (OT) rules that are effective December 1, 2016. (You can read the new OT rule at https://www.dol.gov/whd/overtime/final2016/); as well as federal and state government initiatives to increase minimum wage rates to $15/hour.

The Issue for Businesses – Can The Afford There Workforce?

Many businesses are concerned they won’t be able to stay in business or will have to layoff or reduce hours of long time employees.

Both the pending increases in minimum wage and the change in overtime eligibility means that every business owner or manager—large or small, Main Street or Wall Street—needs to take time to assess the impact on the business. There will be impacted by both changes in 2016 and on an ongoing basis. The minimum wage increases may be spread over several years. However, it seems inevitable that either at the state or federal level minimum wage rates will increase. Some businesses are already been dealing with increases as some states and federal contractors have had mandated increases. California, for instance, has already published its schedule of minimum wage increases through 2023, which will take the minimum wage from the current $10 to $15 per hour on January 1, 2023.

Minimum Wage Increases to Continue

While minimum wage increases may be gradual, they will have a significant impact on your business. You will have some time to reevaluate your business operations and staffing plans. But you will have to make decisions on how to do business with the minimum wage increases. It is still critical to evaluate, but not nearly as urgent as the new overtime policy changes that were issued this year.

You should take note the overtime compensation level is not a one-time change[1]; this new rule incorporates a review and increase in standard salary level every three years! These are ongoing, recurring changes to your business’s cost structure.

So what do we as business owners need to do? First, we need to understand the impact on our specific business. This means that we need to develop tools for quantifying the impact to our business; these are not the theoretical, but the real numbers, and then we need to identify alternatives that will enable us to adapt to these changes.

Do the Math — Calculate Your Financial Snapshot for Overtime Impact and Minimum Wage Costs

You need to invest the time to do detailed calculations and analysis (or have it done for you). This is not the time to do back-of-the envelope calculations or pull out the paper and do some rough estimate. We need to understand that to survive and thrive we must have hard numbers to plan with. We also have to realize the timing of these changes.

So how do we take steps to comply and still stay in business? Understand the impact on the business. To do this identify the following:

  • Who in your organization is currently exempt from overtime wages because they are in a management position and makes less than $47,476 annually for a full-year worker?
  • Who in your organization is currently a minimum-wage worker? How many hours per week do they work?
  • What is your current cost structure (aggregate) and the current wage/salary, payroll taxes, and other wage based benefits? This can be as simple as exporting your profit and loss statement for your most recent financial year or year-to-date numbers from your accounting system.

Multiple States Minimum Wage Complexity

You will also need the following:

  • The planned increases (amounts and dates) in minimum wage by state.
  • A spreadsheet tool to do calculations (you can do them manually, but as this is going to be recurring/ongoing issue your business has to monitor, a spreadsheet tool is best).

Your Current Costs with the New Rules — More Math

Take your current employees and pay rates and enter them into the spreadsheet. For each manager that is paid less than the standard salary rate for overtime, determine if they normally work more than 40 hours per week. If they do, examine what the overtime rate per hour would be multiplied times the average weekly hours over 40 each week (e.g., if the person works 50 hours week on average, then you will have 10 hours of OT at the OT rate—annual salary/52/40 multiplied by 1.5).

Example: An Assistant Manager works 50 hours per week on average. Her salary is $40,000 per year, or $19.23 per hour. Her overtime rate will be $28.85 per hour or an additional $288.50 per week. If the person works 52 weeks out of the year that comes to $15,000 per year in overtime versus a salary increase to get him/her above the standard salary level of $7,477.

Alternatives for Complying with OT Rule Change

If you work through the example above, you will see that just on salary alone without considering payroll taxes or other wage-based benefits. In this example, you can see it is less expensive to increase base wages to above the threshold salary. If you had only one employee impacted this might be your least expensive alternative and make the most sense for your business. Your business, like most will find that more than one employee is impacted. From experience, restaurants, retailers, manufacturing, and every business without a large proportion of automatically exempt employees (accountants, lawyers, etc.) will be the most effected.  You need to ask yourself some key questions as you analyze your business:

  1. What would be the ripple effect if you increased the assistant manager’s salary to get her out of the OT eligibility and it brought her almost equal to the manager who is exempt from OT?
  2. Do you increase the manager’s salaries too? Can you afford it?
  3. What happens to your profits?

Ripple Effects

You may find ripple effects like: increased hours worked by exempt employees, need to increase other exempt employees salaries to maintain parity of roles and responsibilities with compensation, managing more workers working part-time, reducing total workforce, etc.

Regulatory Note:

Time for a quick aside: You should know that  the Fair Labor Standards Act does not define full-time or part-time hours, other regulations and laws come into play. However, other regulations do contain definitions that become applicable as the government tends to apply those regulatory definitions to you.

Beyond the Known Rule Changes — More Ripples

Also, you will find that many regulations kick in at a certain level of employees (25, 50, etc.). The Affordable Healthcare Act (ACA) goes into effect when an employer has 50 or more full-time equivalent employees.[2] So you need to beaware of the definition of “full-time” when developing your alternatives. It becomes important, even critical to your organization’s viability. Also, ruling like the IRS’s “joint employment” rule makes it more complex to determine how many employees you have as does the redefined guidance on determining who is an employee and who is an independent contractor.

Develop Alternative Scenarios on Staffing, Wages, and Your Business — For Today and On-going Changes

After you have done the math for your business,  you will walk through the decision-making process for your business. You will evaluate  your staffing, roles and responsibilities, policies and procedures. You will also want to consider the ripple effects of each alternative. The starting point is to understand your alternatives for becoming compliant. Once you identify the alternatives for complying, you then calculate the direct financial impact of each on your organization. Finally, you take action to implement your decision.

If you need more assistance understanding of the ripple effects, my webinar series shows how to help determine the real financial impact on a business and how to redesign a business to offset increased labor costs, stay competitive and profitable. Go to  Overtime Webinars to register for a webinar.

 

[1] Per the Final Rule, standard salary level for determining overtime eligibility will be updated every three years. It will provide 150 days notice of the new level—meaning you will have 150 days to make changes in your organization’s compensation levels, staffing structures, and work schedules to adapt to the change.

[2] Under ACA, if an employee works 30 hours per week or 130 hours per month or more, they are considered a full-time employee. So employers with 50 or more employees have to think about the number of hours worked and complying with ACA rules as well.

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