How overtime pay changes could affect Texas employers

Photo by Todd Wiseman

The Department of Labor’s impending proposal to dramatically change the cost of overtime pay exemptions under the Fair Labor Standards Act may force Texas employers to increase pay to an estimated 400,000 employees if the proposal is finalized without changes. As currently written, the proposal would increase the minimum annual salary most employees must earn to qualify as "overtime pay exempt" to $50,440. This is more than a 50 percent increase from the current annualized salary of $23,660.

This new pay matrix could have a devastating effect on Texas employers. For example, if we assume all affected employees currently earn $37,050 a year (the halfway point between the current minimum and the newly proposed minimum), the increase could cost Texas employers close to $5.4 billion in additional pay just to meet the new minimum for exempt employees.

While the final rule is targeted for a July release, many speculate it may not become effective until later this year. Adding further concern is the fact that employers may have as few as 30 days to comply with the new rule.

Many observers are anticipating that the Department of Labor's proposal will become final with no changes. If so, this may involve reclassifying up to 10 million employees nationwide. The U.S. restaurant and retail industries alone will likely see an increase of at least $874 million in direct labor costs to comply with the new rule, according to the National Retail Federation.

Many employers are asking where the money will come from to cover these costs. They may be forced to reduce staff, reduce employees to less than full time, lay off employees or even close their doors if cost of doing business becomes too high.

How can Texas employers comply with the minimum salary changes? There is no cookie-cutter approach to managing these changes, but here are some options to consider.

  1. Increase salaries. If currently exempt employee salaries are near the new minimum, a solution is to simply meet the new salary minimum. If those employees are currently earning $900 a week, it may be easier for the employer to bump them up to $970 a week rather than make other, more drastic changes.
  2. Convert employees to hourly pay rates. Employers may choose to convert lower-paid salaried employees to a non-exempt (usually hourly) status and pay them for overtime hours worked. In this scenario, employers may require employees to obtain management approval before working overtime hours in order to keep costs down. But remember, if an employer does this, it still has to pay for all time worked, even if the employee has violated the rules. Employers cannot refuse to pay for time actually worked.
  3. Hire additional employees. Companies may decide to hire additional employees or reduce hours for other employees to avoid overtime pay costs. This can be a complicated balancing act.
  4. Change the workweek measuring period. This option might work for employers whose employees work a number of consecutive days and then are off for several days. For example, if employees work 12 hours for seven days, then are off for seven, the employer might save money by establishing a Thursday-through-Wednesday workweek rather than a Monday-through-Sunday workweek. However, changes in the workweek should not happen more than once in response to the new DOL pay rules.

National politics may be another consideration: Because the final rule is expected to be implemented this year, the presidential election may be a wild card in how things play out.

The DOL may implement the final rule before the Obama administration leaves office. This could leave employers with as few as 30 days to comply. On the other hand, if a Republican takes office before the final rule is implemented, the new rule might be changed or scuttled. There are more than a few political scenarios that could affect the outcome of the new pay rules.

Texas employers should brace themselves for a sea change and plan as though the new rule will take effect as currently proposed. It is far better to do so now, rather than scramble to comply after such a significant a change becomes law.

Michael V. Abcarian

Managing partner, Dallas office of Fisher & Phillips

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