The new federal overtime law: Our thoughts on assessing the impact, implementation and communication

The Department of Labor recently passed a new regulation that updates overtime pay requirements. The new ruling increases the salary threshold requirement for employees to be classified as “exempt” from overtime protections, and will come in two stages:

• Effective July 1, 2024 — the salary threshold will increase to $43,888 (a 23% increase from $35,568).
• Effective January 1, 2025 — the salary threshold will increase to $58,656 (a total increase of 65% in less than a year).

With increases like this — as well as a planned update to the salary threshold every three years, employers, understandably, are concerned. There is a concern not only with staying in compliance and avoiding the costly potential of back pay and civil penalties, but also with the type of impact this change may have on their financials, employee morale, and engagement for employees who are reclassified and their managers, operations and productivity.

How will the new ruling affect your organization?

As with any big change, employers need to know what they are dealing with before they can address it. The first step is to do an audit of the jobs, functions, and populations that would be most impacted by the upcoming changes. This is a good time to review any jobs that could be considered borderline for exemption status, not just in regards to the salary threshold test, but the duties test as well. While these changes will certainly be a burden to some extent, they can also be an opportunity to get your house in order and limit future risk.

Once the at-risk jobs, functions, and populations are known, collect details about the hours worked to understand the cost implications of the upcoming changes. Pick a census date for all of the data, which assumes no workforce movement, just to get a rough number of what the cost will be (this can be refined later).

Making decisions

After the audit is complete and the high-impact areas, along with costs, have been identified, there are really two options: keep an employee exempt by raising the salary or convert them to non-exempt.

Based on what your audit finds, it may be that both strategies are used, but that will completely depend on the organization’s specific circumstances. For instance, an organization that considers a 4%-5% salary increase for a population of 20 as immaterial may keep those employees exempt. 

3 things to considerations when converting to non-exempt

If an employer does decide to convert some populations to non-exempt, there are a few considerations to bear in mind.

First, the salary will need to be converted to an hourly rate. If the individuals in the population have been regularly working more than 40 hours a week, this will either be an increase in fixed cost or will require additional monitoring to control costs. To remain competitive, it’s also important to consider external benchmarks when adjusting the hourly rate.

Second, the staffing model and capacity should be reviewed to understand if there are opportunities to reduce overtime; this may mean increasing capacity, and therefore fixed costs, but this could prove beneficial in the long run.

Third, consider re-designing jobs and how they are structured. There may be, for instance, an opportunity to move higher-level duties to roles that remain exempt and push down more repetitive tasks to the non-exempt workforce.

Implementation and communication

Once the numbers have been crunched, the real work begins: communication and change management. It’s critical to ensure all communications remain under legal privilege, even within HR. Be sure to manage the expectations of the project by explicitly stating what decisions will be driven by the outcome of the project. Also, proactively and uniformly agree on communication around the reclassification of roles from exempt to non-exempt. Explain why the organization is doing this and the impacts, if any, to pay and career trajectory. Remember, exemption status for some is a point of pride, an accomplishment that has been reached. The organization needs to remain sensitive to that potential response and anticipate the best approach for handling such responses. In addition, training will be needed to help newly re-classified employees understand how to properly track their time, and to equip managers with the necessary tools to effectively manage these newly designated non-exempt employees.

Along with communication, there are other considerations around how pay structures, incentive/bonus plans, job architectures, etc. will be impacted. Perhaps one of the most critical in this group of considerations is pay compression. It is very easy to see an overall cost and focus on that and not consider how that cost affects other roles, specifically those who manage the roles receiving increases. In addition to pay compression, questions around career pathing and pay increases will likely arise. All of these should be part of the discussion and may require a re-evaluation of your organization’s philosophy on pay transparency.

Partner with an expert

As you know, many HR teams are doing more with less, and adding one more thing to the list of priorities might be difficult. Rest assured, Mercer has experts who are here to help in a variety of ways. Whether it’s updating job descriptions, modeling the cost impact, conducting compression analysis, helping you revamp your pay transparency model, or developing communication to employees and managers, Mercer is well-versed in partnering with organizations just like you to ensure these transitions happen efficiently, effectively, and empathetically.

To help you navigate this change effectively, we are offering a 30-minute call to discuss the implications of the new overtime ruling for your organization and explore strategies for compliance. During this meeting, we can:

• Review the key provisions of the new overtime ruling and how they may impact your organization
• Review data from Mercer’s survey databases on how this new ruling will impact your industry
• Discuss strategies and best practices for compliance and risk mitigation

Call us today at 855-286-5302 to set up your complimentary meeting.

About the Authors

James King is a Principal in Mercer’s Career business in Dallas, TX. He assists clients with talent strategy, workforce management, broad-based compensation, and sales compensation.

LaCinda Glover is a Partner in Mercer’s Career business and specializes in total rewards. LaCinda has been with Mercer for over 18 years. In addition to her consulting role, she is the Career Practice Leader for Kentucky and Tennessee and works in a variety of industries.