President Obama has announced plans for a dramatic overhaul of the Fair Labor Standards Act (FLSA), particularly rules for managerial overtime exemption calculation. Obama said "Today, I'm going to use my pen to give more Americans the chance to earn overtime pay that they deserve."
Linked to calling on Congress to raise the minimum wage to $10.10 per hour, Obama claims the salary threshold and the FLSA duties test need to be revamped to provide more entitlement to overtime compensation. The Department of Labor will be tasked to change the test for overtime exemption and salary caps for overtime eligibility.
President Obama stated, "Overtime is a pretty simple idea. If you work more, you should get more." This sounds like a pretty simple concept, but in all actuality, what this would mean for employees, businesses and consultants is entirely another matter. This is far from a simple idea. The resulting change from exempt to non-exempt status will result in significant career changes that will have negative effects to managerial career paths.
The FLSA currently rules that if employees earn less than $455 per week despite the fact that they may be otherwise classified as managerial, they still qualify for overtime and time-and-a-half. Raising the threshold consistent with common sense inflationary data makes sense but changing the duties test is an entirely different matter with significant consequences.
But President Obama plans to raise the wage threshold to up to the potential level of $970 per week. This is a significant increase of over 200 percent in the threshold for overtime liability. The last time this was increased was in 2004 when President George W. Bush raised the salary threshold from $250 to $455, the first increase since the 1970s.
With businesses struggling to understand the Obamacare responsibilities and associated liability, the new focus on changing the salary threshold and managerial duties test for overtime liability looms with budgeting, futuring and determining margins. Simply, the definition of a supervisor will be under scrutiny with government intervention to change that career playing field and associated costs.
When the primary duties test to determine managerial exemption was revised in 2004, a number of factors were created to make the correct determination. The Department of Labor considers "this current test a "loophole" in U.S. wage-and-hour law that lets employers treat many workers as overtime-ineligible managers even if a lot of their work is the same as non-managers, who do get overtime."
But is this a loophole or a concept of overtime exemption that results in a different mechanism for compensation and recognition?
The changes to the 2004 duties test for managerial employees required significant investment of business time and money. Many of us recall the labor intensive job of researching the changes to the primary duties that required audits of individual employees' FLSA exemption status. Remember, this change would result in an employee specific designation of overtime eligibility, not a classification wide determination.
This change resulted in millions of business dollars spent on this audit process. Boutique businesses and consulting firms became rich by providing the service of interpreting and auditing employees' exemption statuses.
Small businesses were hit particularly badly by these expenses related to not only the change of exemption status, but the resulting consulting fees, adjustments of salary budgets, and reductions in staffing levels.
A quite unexpected effect of changes from employees' exempt to non-exempt status was expressed by countless managers. Frustration over the loss of perceived job status of managerial jobs was rampant. Titles were more important than overtime eligibility; their careers were taking a back step if their jobs were no longer eligible for management exemptions. There was a loss of stature and benefits.
The concept of exempt employees "not getting paid their time worked" is not a blanket accurate statement. Instead of punching the time clock, exempt employees report their time in weekly increments instead of hourly or daily. In other words, if they don't work an entire day, their time is not reported as exception time. If they work late into the evening, they may arrive later, generally balancing their work as opposed to the time clock. Remember, they get paid for the work product, not clock hours. They are regularly eligible for different bonus plans, vacation entitlement, and stock options.
Employers will change titles, salary structures, and staffing levels. Management jobs will be eliminated resulting in fewer opportunities for upwardly mobile employees who have strived for entry level management jobs. Resumes will need to be adjusted reflecting an appearance of a demotion within the management ranks.
More jobs may be offshored. This change will discourage job growth; will not result in the number one priority for Americans: jobs creation. Like a shot in the arm with side effects; this is going to hurt, not help the American workforce.