HR Compliance

5 Scenarios Caused by the Overtime Pay Requirements of FLSA

By

Robert Barclay

| Jul 14, 2015

This article has been updated to reflect the final rule. 

Previously, under the FLSA many salaried employees with managerial jobs who received more than $455 a week ($23,660 annually) weren’t entitled to overtime pay, but that has changed under a new rule recently finalized under the Obama administration. Under the new rule announced by the Department of Labor in May 2016, workers who earn up to $913 a week ($47,476 annually) would have to be paid overtime.

This new threshold could affect as many as 4.2 million workers nationwide the first year, according to Department of Labor numbers.

This change brings about several possible scenarios regarding employees’ paychecks, including:

  1. Some salaried employees previously defined as exempt from overtime will receive overtime pay.  Under new regulations, workers who make less than $47,476 per year should be reclassified as “non-exempt,” making them eligible for time-and-a-half overtime pay when they work more than 40 hours a week.
  2. Employees could receive raises just below the new salary level. For those employees with salaries just below the new $47,476 threshold, employers may choose to raise their pay to the new threshold so they will continue to meet the overtime exemption status.
  3. Send employees home at 5:00. Employers may choose to pare back hours for employees who were previously exempt, but will no longer be because of the new rule. In this scenario, employers may need to recruit additional employees to help cover the extra hours that were lost.
  4. Many could see a reduction in benefits. In order to budget for the additional labor costs incurred by these changes, some employers may choose to re-categorize salaried employees to hourly and reduce their benefits.
  5. Nothing changes. The reality is, some employees who become eligible for overtime under the new rule may continue working long hours and not see a change in pay. This is because employers have the right to drop hourly pay rates to offset any overtime pay that might be owed. However, the downside is some employees may experience a slight pay cut by working fewer hours than normal, because unlike exempt employees, these employees are now paid hourly.

With the final rule expected to be effective Dec. 1, 2016, employers need to begin planning now for potentially significant impacts to their labor costs.

About the Author

Robert Barclay

Robert Barclay has been the Tax Research Team Lead at Paycom since 2012, and has been instrumental in such company projects as the development of its Affordable Care Act compliance product, implementation of geolocation services and redesign of Form W-2. He joined Paycom in 2011, bringing more than 20 years of experience with the capital markets consulting practices of Ernst & Young in Memphis, Tenn., and Birmingham, Ala.; and Causey Demgen & Moore in Denver, Colo. A native Oklahoman, Barclay is a graduate of Rhodes College in Memphis, where he played football as linebacker.

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