In May of 2016, President Obama announced that, by the figurative stroke of his pen, more than 4 million Americans were going to get a raise. This would be accomplished by new overtime rules under the Fair Labor Standards Act (FLSA). The intent of the new rules was to drastically reduce the scope of “exempt employees,” that group of salaried employees who are not entitled to time-and-a-half overtime pay. The new rules were scheduled to go into effect Dec. 1.
But to quote Lee Corso, “Not so fast, my friend!” At the 11th hour, a federal court in Texas issued a preliminary injunction delaying implementation of the new rules until a full trial on their legality could be conducted. That trial will not occur until well after Donald Trump is inaugurated, and he way well decide to block those rules or their enforcement.
But wait, there’s more. On Dec. 1, the Obama administration filed notice that it would appeal the Texas decision and seek to get the new rules back on track. But there is no guarantee the appeal will be heard by the time you read this, or what the results of the appeal might be.
Against this backdrop, let us consider the new overtime rules and how to address them in the dealership environment. After all, they could one day become the law of the land.
Background and Foreground
The FLSA and its overtime rules became law in 1938, during the depths of the Great Depression, when the national unemployment rate stood at 18%. President Roosevelt promoted the concept of time-and-a-half for every hour over 40 in a work week, but not to give hourly employees a raise. By imposing a premium for overtime hours, Roosevelt created an incentive to stop overtime work and force employers to hire more workers.
From its inception, the FLSA exempted certain employees from the overtime pay requirement. “Exempt employees” were salaried workers who performed executive, administrative or professional tasks. These “white collar” jobs were exempt if the salaried employees made more than a certain threshold amount (currently $23,660 per year), as well as “highly compensated individuals” who made more than $100,000 per year.
Finally, commissioned salespeople are also exempt — if more than 50% of their earnings are from commissions and their regular pay is at least 150% of the minimum wage in weeks in which they work overtime.
Fast-forward to 2016. President Obama intended to increase the salary level necessary to be exempt under either the white-collar worker or highly compensated employee exemptions. The white-collar level would nearly double, to $44,476. The highly compensated level would increase by 34%, to $134,000. The rules for commissioned salespeople would remain unchanged.
The reality is that employers are no more likely to increase their payroll expense now than they were in 1938. They will be incentivized to reduce the hours of employees working more than 40 hours per week and, if necessary, hire more workers. So instead of getting a raise, many employees would see a pay cut. And if a dealer turned one 50-hour per week job into two 25-hour jobs, you could save on benefits payable to full-time employees.
Another way dealers can react to the new overtime rules is to convert salaried exempt employees to hourly employees. This may be a bitter pill for some currently exempt employees to swallow, but it may be necessary if the dealership cannot absorb a massive increase in labor expense.
Take an exempt employee who now makes $38,000 per year and works 50 hours per week. You could convert that employee’s compensation to $13.29 per hour for the first 40 hours, and $19.94 per hour ($13.29 x 1.5) for the 10 hours of overtime. This equals $38,000 per year, provided the actual overtime hours get worked.
The alternative is to pay the time-and-a-half penalty, effectively giving this employee a $14,250 raise. The cost of this approach would quickly become unbearable. You also could forbid overtime, or pay the penalty and cut benefits to compensate for the higher wage component to your labor cost.
Whatever approach you take, should the new overtime rules eventually go into effect, be sure to consult with your own labor counsel before changing your pay plans. As valuable as this magazine is, it is not the same thing as legal advice!
James S. Ganther Esq. is the co-founder and CEO of Mosaic Compliance Services. He is a dealer compliance expert and a prolific writer and speaker. Email him at [email protected].