A small business owner already knows that wages and salaries eat up a significant portion of revenue. In some industries, the cost of labor can account for 20-50 percent of total operating expenses, and in the coming year, the cost of a company’s best employees may jump. This is a direct result of a presidential memorandum issued by President Obama to the Secretary of Labor updating the white-collar overtime exemption of the Fair Labor Standards Act. This exemption specifically affects executive, administrative, and professional employees. The memorandum bypasses the consent of Congress. In early July, the Department of Labor published their notice of proposed rulemaking, which outlines the proposition. After finalization, the rule will to go into effect in spring 2016 or early 2017.
The proposed changes update the salary level from $23,660 annually to approximately $50,440 for standard white-collar employees and from $100,000 annually to approximately $122,148 for highly compensated white-collar employees. The salary level will be adjusted for inflation every year based on the earnings index.
The goal according to the Obama administration, was to update 2004-era minimum salary levels and reduce litigation that is a result of misclassified workers. The administration believes the changes will put more money in the hands of the middle class, which will drive the economy, as well as improve the morale of the workforce.
However, some business leaders believe that optimism is not realistic. According to Scott Bowers, vice president of Human Resources at LassiterWare in Leesburg, the updated overtime rules for white-collar workers can have negative effects on small businesses in Lake County. The financial impact may put some small businesses out of operation; prices of goods and services can go up, employees can lose flextime as well as other job perks, and litigation may increase. While the DOL argues its analysis on potential employer strategies and business costs are sound, according to Bowers, it is flawed because numbers may be highly underestimated.
The DOL’s analysis is based off economic models that are merely best guesses. In year one, projected costs include $254.5 million for regulatory familiarity costs, $160.1 million in adjustment costs, $178.1 million in managerial costs, and $1,482,490,000 in transfer of profits costs. Affected white-collar employees are estimated to be 4.6 million. However, according to Bowers, industry experts predict 10.5 to 21 million white-collar employees could be affected; the direct administrative costs to private businesses may double or exceed $1 billion, and the transfer of profits cost could be between $2 billion and $4 billion.
The strategic options predicted by the DOL are summarized in four types of workers. “Type 1” workers will be reclassified as hourly and work 40 hours or less. “Type 2” workers will also be reclassified as hourly and work some overtime. “Type 3” workers will be reclassified as hourly, but their hours and pay will be calculated similar to the employee contract model. Their base pay will be adjusted downward, so total hourly wages, straight, and overtime pay will equal their previous salary pay. “Type 4” workers remain salaried and exempt from overtime. Their base pay will increase to the $50,440 proposed threshold.
Bowers, who was Florida’s Human Resources Professional of the Year in 2012, offered some suggestions on what small business owners in Lake County can do to prepare for these coming changes:
Make a list of employees within your organization who fit the white-collar exemption and earn less than $55,000 a year. Evaluate their overtime hours and decide if you can afford to pay a 150 percent premium for those hours. Figure if you can reduce base pay so that straight pay and overtime pay combined, equal last year’s salary expense. Can you create two part-time jobs instead of having one worker work 60 hours per week? Write your congressional representative and request the $500,000 threshold that defines small business be increased to reflect the current inflation level, which will exempt the smallest businesses that don’t do interstate commerce.