The Fair Labor Standards Act (FLSA) was signed in 1938 by Alabama Senator Hugo Black. The law was put in place to ensure a minimum wage, define a 40 hour work week and prohibit child labor. FLSA’s objective was to eliminate labor conditions detrimental to the maintenance of the minimum standards of living necessary for health efficiency and well-being.
Provisions of FLSA and changes proposed
FLSA provides guidelines to determine which employees are exempt and non-exempt from the provisions. In its current state, employees earning more than $23,600 annually (or $455 weekly) are exempt from being eligible for overtime. When employees do not reach the threshold, work over 40 hours gets paid at time and a half of the hourly pay. The overtime wage bill was signed by President Obama in 2014 which would qualify employees without $47,476 (or $913 per week) as eligible for the overtime compensation. FLSA also considers highly compensated employees who earn $100,000 or more exempt. The new rule would have raised this threshold to $134,004.
Where the FLSA Ruling currently stands
This ruling was going to be in effect from December 1st 2016. However, a coalition of 21 states and 50 businesses sued the federal government in a lawsuit to block the overtime rule. As a result, an injunction was issued prior to its start date of Dec 1st. An estimated 4.2 million American workers were set to benefit from the rule change to the tune of $470 million. Some organizations who wanted to side-step the change bumped their employees pay to the $47,476 mark. These organizations are now either taking these raises back or postponing them indefinitely due to low hopes of the law passing under Trump administration.
As seen from the above incidents, there has been quite a bit of back and forth in companies waiting for the FLSA ruling.
HR can take proactive measures
If your organization is regularly paying overtime, you will likely benefit from taking a good look at the costs and benefits of where those overtime hours are going.
The Costs
Overtime hours in manufacturing increased sharply during the 1990s (48 %!) and have remained high. For many, it has become a way to “make ends meet.” While the obvious cost of overtime hours is the higher pay rate compared to regular hours, another costly downside: Too much overtime can lead to fatigue, which in turn can lead to illness or injury, which then leads to increased absenteeism. All of these effects have an impact on the company’s productivity, and in turn, the bottom line.
The Benefits
On the other hand, in some instances, there is a clear cost benefit to overtime. In certain situations, over time (despite the higher rate per hour) can actually be a cost-effective solution. In call centers or retail industry with seasonal spikes in customer demand, staffing correctly is tricky. In this case, overtime hours can be cheaper than regular hours when factoring in:
- The fixed costs of benefits associated only with regular hours
- The cost of paying workers who are idle
- The trade-off of understaffing and sacrificing opportunities to connect with customers
Our Insights
If your organization gave a raise that is now being suspended or revisited in light of the new changes, then communicate how employees will be affected. There can be a lot of resentment when an expected raise is taken away, driving to disengagement at work. Keeping managers in the loop to speak with their direct reports to make them understand the current state will be helpful.
In large companies and government entities, overtime is often used routinely on an as needed basis, and often there is no accountability or way to track its impact. When budget cuts need to be made, overtime can be a good place to look, but you need to understand when it is essential and when it is not. Your HR software should provide the data you need to make good strategic decisions around overtime pay.
As HR, you need to be aware of how employees are spending their time and what make more sense - employing more regular employees or keeping on paying overtime to hourly workers. There are advantages to be gained from both the options that can only be discovered once you take a closer look. Proactively making probabilistic plans in either scenarios backed with data and getting support from all stakeholders should make for a smooth transition for your organization.
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StarGarden HCM’s flexible HR solution helps mid to large size organizations quickly respond to changing regulatory requirements. If you are looking for HR software for compensation management then talk to us today to find out how we can help.
