How new OT laws affect compensation for recent grads, employers

Note: This is the third article in a series of articles focusing on the new overtime laws. Read the first two articles in this series – how the new overtime laws will affect interns and recent grads and how the new overtime laws will affect employers.

The DOL’s increase to the FLSA’s minimum compensation limits is a game changer for many companies, says Joe Kager, Managing Consultant and founder of the POE Group, a Tampa, Florida-based management consulting firm that advises companies on becoming great places to work by developing reward systems that attract, motivate, and retain employees.

Employers who have assigned an exempt status for jobs with compensation above the current minimum ($23,660), but below the new minimum of $47,475, will need to consider a variety of factors before the December 1, 2016, implementation date.

Effect on food service and hospitality management jobs

This will affect many lower level food service and hospitality management positions classified as exempt under the FLSA, says Kager. If the positions are to remain exempt, employers will need to raise compensation to the new minimum. This alternative may be appropriate for jobs that will be required to work substantial overtime. If a compensation increase to the new minimum is not feasible, employers will reclassify the positions as non-exempt and be required to pay overtime for hours worked over 40 in a week.

Deciding the appropriate action will entail a comparison of the two alternatives based on historic hours worked. This could have an additional effect on employees.

“There may be psychological issues to consider if employees have their positions changed from exempt to non-exempt, requiring good communication about the change,” says Kager. “This could be considered by some employees as a demotion.”

How employers will classify recent college grads

Kager says the Poe Group has advised clients to classify new college graduates as non-exempt, assuming they will not initially exercise discretion and independent judgement required in the administrative exemption test. Most college graduates hired into professional positions under the FLSA exemption, whose compensation is generally above the $47,475 minimum, says Kager.

Dan Walter, President and CEO of Performensation, a management consulting firm that engages with leaders to create human capital strategy, compensation, and reward programs that drive firm performance, says he expects employers are going to be reactive to these new regulations.

Walter discussed the short and long-term impact of how the new overtime laws will affect recent college grads and employers.

Short-term impact of new overtime laws

“It is likely that there will be little, if any, change in the amount of jobs available for college students and recent grads in the near term,” says Walter.

Therefore, the short-term impact on companies, regardless of size, is that they will be required to do one or more of these things:

• Raise pay: If they can afford to do so, employers will increase wages to people above the threshold in order to maintain exemption status.
• Manage hours: Many companies won’t be able to effectively manage the time. The past trend is that nonexempt workers feel like they aren’t worth as much from the professional recognition standpoint. They may choose to leave their current position and be reclassified as non-exempt to a different company with the hope of feeling more valued.
• Hire more: Some savvy companies will hire more nonexempt workers so fewer people will work overtime. This will likely occur in larger companies, who are disciplined and more experienced in forecasting and financial modeling. These companies will spend the time and money to make sure that the changes take place and are administered effectively.

“Companies will find that in some groups it will be more cost effective to hire additional staff instead of paying for the overtime,” says Walter. “College recruiting will likely fill these newly created jobs.”

Long-term impact of new overtime laws

The combined impact of the economy and regulation will cause downward pressure on the creation of new entry level jobs due to companies redesigning roles, technology automation of non-exempt duties, and potential offshoring where possible.

“This will occur despite the demographic shift in the workplace,” says Walter. “The retirement of the Baby Boomer generation will likely lead to a downward shift in consumer goods demand with a moderate uptick in services.

The long-term impact of the new overtime laws will focus around these changes, says Walter:

• Redesign jobs: There will be a move to redesign jobs to meet the 40 hours per week and reassign certain duties of those jobs onto someone else that is exempt.
• Automation: Companies will be pushed more to the automation of certain duties to offset overtime costs. There will be an increase in companies using technology to automate lower-waged jobs.
• Increase in offshoring: The effects will continue to add additional pressure to offshoring where possible. Moving jobs out of the United States will cut company costs.

Walter provided analysis. “Now that the nonexempt employee population has increased significantly, it will be more critical that companies manage overtime expense and therefore the hours worked by these employees will need to be closely monitored. The employees with pay that is not near the threshold will have their hours restricted more. Conversely, those employees that are near the threshold will likely receive a pay increase to meet the new threshold and therefore their work hours will likely remain unchanged.”

Effects on management trainees

Walter uses a manager trainee as a simple example of this: If the manager trainee is near the threshold, he will find that the employer will increase their pay to meet the exemption. Therefore, employees that fall into this type of category will work the same amount of hours as in the past. However, for those manager trainees significantly below the threshold, they will find their hours reduced to manage the amount of overtime work.

New overtime laws and small businesses

The new law on overtime – anyone earning under $47,476 will be eligible for overtime – sounds great on paper, because it translates into a substantial raise for those working long hours, and that’s always a plus for the employee, says Vicky Oliver, a multi-best-selling author of five books, including 301 Smart Answers to Tough Interview Questions (Sourcebooks 2005), named in the top 10 list of “Best Books for HR Interview Prep,” and 301 Smart Answers to Tough Business Etiquette Questions.

But if the new law becomes cost-prohibitive for small businesses, look for some unanticipated side effects, such as businesses possibly “demoting” full-time staff positions to that of a part-time or freelance role in an effort to avoid the overtime rule.

“Small businesses are responsible for the majority of new jobs,” says Oliver, a sought-after speaker and seminar presenter. “As always, it will be interesting to see how this particular rule shakes out. Some employers may find that reducing hours to side-step paying overtime will require creating new part-time or full-time positions.”

For more career tips, check out our blog and follow us on LinkedIn, Twitter, Facebook, and don’t forget to subscribe to our YouTube channel.