Iowa employers have a number of options and strategies available to them to respond to new federal overtime rules announced in mid-May by the Obama administration, local experts say. 

On May 18 the U.S. Department of Labor announced the publication of a final rule that updates federal overtime regulations for the first time in 12 years. 

The new rule — which, barring legal challenges, will go into effect Dec. 1 — significantly increases the standard salary exemption level for executive, administrative and professional salaried employees. That means an estimated 4.2 million American workers who were exempt from overtime pay may now be subject to overtime rules. 

In Iowa, some 44,000 workers may be affected, according to the Labor Department. 

Currently, salaried workers earning more than $23,660 annually are exempt from overtime pay. Under the new rule, the standard salary exemption level is $47,476 annually for a full-year worker. Future automatic updates to these thresholds will occur every three years, beginning Jan. 1, 2020. 

The new rule also increases the threshold for highly compensated employees who are subject to a minimal duties test (certain tests regarding job duties that must be met to qualify for exemption) to $134,004, up from $100,000. 

Employers can now also use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the new standard salary level.

“There’s a lot of anxiety out there,” said Michael Staebell, a compliance specialist with the Dickinson law firm who recently retired as a supervisor with the Department of Labor’s Wage and Hour Division after 33 years. 

“I think some of the anxiety that’s out there in the media is overdone a little bit,” he said. “What we’re hearing from our clients is, ‘We want to be ready.’ What I really expect is a big push from the companies that are really thinking ahead to plan ahead. Then before Dec. 1, I expect another big rush as the procrastinators get busy.”

While he agrees the new rule will burden companies, particularly small businesses, there are several options available to them that don’t necessarily have to cost them money. 

As an initial step, employers are going to want to analyze all their salaried employees to determine how close they are to the threshold and whether they want to raise their salaries to make them exempt, or choose to make those salaried employees hourly and make them eligible for overtime pay.  

Harold Kavan, health and human services practice leader at the West Des Moines office of Holmes Murphy & Associates, said employers must consider how they can provide the same level of service with their employees without increasing overtime expenditures too much. 

Additionally, “you need to consider the impact on morale and culture, because that may drive part of your decisions in another way than you might otherwise make,” he said. 

For those workers whose salaries are slightly below the threshold, companies need to decide whether raising their salary above the threshold to make them exempt from overtime might make sense. 

Employers have to realize that more than likely, there will be some positions that they will have to convert to hourly, Staebell said. 

“There are going to be certain situations where it’s just unavoidable,” he said. “There are going to be positions that are significantly below that new threshold. So I would say if given the viable option to bump up their salary and keep them exempt, that’s the best for all concerned, but that’s just not always going to be possible. So I think employers have to realize more than likely there will be some positions they will have to convert to hourly positions. And that’s a difficult situation, and the key is communication with employees.” 

Kavan observed that companies may want to look ahead at least three years to when the pay threshold will automatically increase. The best estimates are that the threshold will increase to between $50,500 and $52,000 at the first automatic adjustment. The adjustment will be set to keep the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region.

“The interesting part is that this is the first time (the Department of Labor) has put in automatic adjustments to the threshold,” he said. 

Previously, companies had the same thresholds for 12 years, and prior to that, the threshold hadn’t changed in 25 years. 

“So now we’re looking at automatic changes every three years. I think unfortunately that’s going to create some headaches for companies,” Kavan said. They’re going to have to put some regular review processes in place.” 

Staebell advised that employers should prepare for the changes, but that there’s no need to implement changes before Dec. 1. 

“It’s been very common for wage and hour regs to get challenged in court, which pushes the implementation date back,” he said. “So don’t rush into changing people’s pay or have them go hourly sooner than December.”

Six strategies to consider 

The ball is really in the employer’s court on choices about how to craft workers’ pay under the new rules, Staebell said. Here’s a look at some of the potential strategies businesses can employ.

U.S. Department of Labor suggested strategies:

1. Raise salary and keep the employee exempt from overtime.

Employers may choose to raise the salaries of employees so they are at or above the salary level to maintain their exempt status, if those employees meet the duties test. (That is, the duties are truly those of an executive, administrative or professional employee.) This option works for employees who have salaries close to the new salary level and regularly work overtime.

2. Pay overtime in addition to the employee’s current salary when necessary.

Employers also can continue to pay their newly overtime-eligible employees the same salary, and pay them overtime whenever they work more than 40 hours in a week. This approach works for employees who work 40 hours or fewer in a typical workweek, but have occasional spikes that require overtime for which employers can plan and budget the extra pay during those periods. 

3. Evaluate and realign hours and staff workload.

Employers can ensure that workload distribution, time and staffing levels are all managed appropriately for their white-collar workers who earn less than the salary threshold. For example, employers may hire additional workers.

Staebell’s alternative strategies: 

4. Factor overtime into annual pay.

If a salaried employee is currently earning $30,000 a year and the employer decides to convert that position to hourly, the employer is free to craft his pay so that he’ll still earn about the same annual amount. “In other words, they don’t have to pay $30,000 and then overtime on top of that,” he said. “They can factor in the overtime so that at the end of the year they’ll be at the same amount of pay you’re at now. So by managing that, the employer isn’t on the hook for the $30,000 plus the overtime.” Obviously, the potential downside for the employee is a smaller paycheck if actual hours are below 40 for the week, Staebell said. 
 

5. Pay salary plus half time.

Another consideration is to use a provision for paying salary plus half time, which says that if an employer guarantees the same weekly salary, then overtime premium is due at half time, not time-and-a-half, because the salary covers all the straight time pay. “That way the employee gets the same salary every week, but if they do put in extra time, they’re going to get a little extra above and beyond that,” Staebell said. Some employers have already inquired to his firm about that provision, which is also known as fluctuating workweek. “The experience is that most employers think it’s too much hassle to mess with; but it is a legal option and it is used,” he said. “It’s an option that employers should at least take a look at.” 

6. Restructure bonuses, incentives and commissions.

New under these rules, up to 10 percent of the employee’s nondiscretionary bonuses, incentives or commissions can be utilized to meet the basic salary test in determining whether an employee is above or below the threshold. “That’s going to help employers, because under the current rules they can’t count any bonuses, incentives or commissions towards the base salary,” Staebell said. “I think everyone envisions companies taking a long, hard look at commissions, bonuses and incentives. This might call for some restructuring to get these employees where they need to be as far as their compensation.”