What the New Final Overtime Rules Mean for Your Borrowers

On November 22, 2016, a federal judge in Texas issued a nationwide injunction blocking the Department of Labor’s rule that would require overtime pay for millions of workers. The regulation was scheduled to take effect on December 1, 2016.

New overtime rules go into effect on December 1. The changes could have a significant impact on your borrowers, including many retailers and manufacturers. Here are more details.

Increasing thresholds

Under the Fair Labor Standards Act (FLSA), “nonexempt” employees must receive pay for hours worked in excess of 40 in a workweek at a rate of not less than one and a half times their regular rates of pay. Under existing law, employees who earn less than $23,660 a year (or $455 a week) are nonexempt and, therefore, must be paid overtime. The new rules more than double the income threshold for nonexempt workers to $47,476 a year (or $913 a week).

Conversely, highly compensated employees are automatically exempt from overtime pay. The current threshold for highly compensated employees is $100,000 a year. It rises to $134,004 a year under the updated DOL guidance. Both thresholds (for nonexempt and highly compensated employees) will be adjusted every three years, starting in January 2020.

Calculating overtime pay for employees who fall in the middle — earning between $47,476 and $134,004 under the new rules — requires a duties test. Those who “primarily perform executive, administrative or professional duties” are generally exempt and don’t require overtime pay.

Reclassifying workers

The DOL estimates that more than 4 million workers will be reclassified as nonexempt under the new overtime rules. For many employers, the changes will substantially increase payroll costs and limit flexible work arrangements. For example, a worker who earns $30,000 a year may request to work 50 hours one week to make up for working 30 hours the previous week. Under the new rules, the employer would be required to pay overtime for the workweek that exceeded 40 hours.

Automatic increases to these income thresholds start in 2020. These increases will continue to erode profits and create uncertainty as companies prepare future budgets.

Minimizing the effects

Creative borrowers can minimize overtime costs without violating the FLSA. For instance, they can hire part-timers or independent contractors during seasonal peaks, and monitor how many hours nonexempt employees work and limit their hours to 40 per week. Or they can reduce benefits to offset the incremental overtime costs.

It also may be time for management to revisit capital investment options. In light of growing labor costs under the new overtime rules, automated equipment may now be more cost-effective than ever before. Some borrowers may decide to upgrade their plants with robotic equipment or automated check-out kiosks, which could result in new banking opportunities for your bank.  Contact your borrowers before year end to see whether they’re ready for the new overtime rules.