The Dos and Don’ts of Preparing for the DOL’s New Overtime Rules

Labor Overtime Rule Changes Loom in 2022

Labor laws around overtime compensation for salaried employees remain a heated topic of political debate in the U.S. The issue surfaced yet again after Labor Secretary Marty Walsh testified last summer before the House Education and Labor Committee that he believes the current annual salary cap for certain white collar exempt employees is much too low at today’s threshold of $35,568 a year. To qualify as a white collar exempt employee, workers must perform certain tasks, be salaried, and stay under a designated salary cap.

At first glance, this may sound like a straightforward way to mitigate worker exploitation. But the problem for employers is that when overtime costs skyrocket, it decimates profit margins. Any cap increase would mean that a whole new group of qualified salaried employees would become newly entitled to receive overtime compensation.

Because employers must comply with federal rules, many are getting creative in desperate attempts to preserve their profit margins. Rachmany says he’d consider “hiring freelancers and independent contractors” just to avoid paying overtime during busy seasons. Let that sink in for a moment.

Understanding the Financial Impact

If and when the Department of Labor (DOL) moves forward with increasing salary threshold caps, businesses will need to understand the financial impact to their bottom lines and adjust. The following are three areas of impact that stand out to us today:

1. Smaller Margins on Goods/Services

Your margins ultimately indicate how profitable, sustainable, and stable your business is. There is no more important metric. Increased overtime expenditures will most certainly bring them down. Depending on the size of your workforce, you may be forced to pay those overtime rates whereas your competitors may employ a larger workforce, enabling them to strategically spread working hours evenly to stay under the cap. In addition, your margins are what ultimately make your business attractive to any kind of investor or potential merger. It’s critical to keep them healthy.

2. Forced Expansion of Lean Workforces

Once you crunch the numbers, you may discover that paying for overtime is more expensive than hiring additional salaried employees. But hiring new employees isn’t cheap either, especially in the short term. Typically, it means time spent interviewing, onboarding, and mentoring. Your top performers will contribute less and project quality will likely be affected.

Rachmany clarifies, “we lose the craftsmanship…if you have someone who can perform above average, you want to give them more challenges. But if they fall in the salary bracket of less than $35,568, they will get fewer jobs.”

Beyond increasing workforces, companies lose strategical, tactical, and operational efficiencies that are the business hallmarks of lean workforces. These operational models are designed specifically to create benefits for customers by offering a more value-driven, streamlined approach. When your workforce unexpectedly expands, be prepared to lose agility.

3. Inaccurate Forecast Models

Your models and forecasting should always be the top priority for your business, serving as your ultimate roadmap to success. So when these models are inaccurate, the downstream effects are significant. Salaries, commissions, benefits, taxes, retirement, and more are all impacted. Expect an increase in poor communication, inaccurate project planning, and failed implementation strategies. And the list goes on.

What do we Know Now?

The DOL is planning on releasing a Notice of Proposed Rulemaking in the spring of 2022 which is anticipated to recommend raising the salary level ceilings of the FLSA’s executive, administrative, and professional exemptions.

None of the details are clear yet, but the impact of the revised rules will likely not be negligible. Some House members are even proposing that the cut off be as high as $80,000 per year and should be automatically reviewed on a regular basis.

But the good news is that time is on your side. These rule changes will not happen overnight if indeed they are imminent. The DOL would first need to complete the audit, provide sufficient time for “notice and comment,” and ultimately publish the new rules. The entire process could take up to a year or more to roll out.

How can Businesses Prepare?

Preparation will be essential to ensure businesses are aware of the impending rule changes and not be caught off guard. Take these steps now so you can start to predict the potential impact to your business.

1. Cut Costs and Then Cut Them Again

Begin by taking a long, hard look at your costs. Try to identify which costs do not match up with your company's growth strategy and target those first. Reduce any short term discretionary spending such as travel, training, and delayed capital investments, etc. These will be straightforward areas to target since they don’t tend to have a direct impact on your company’s mission. Next, consider whether there are any redundancies in your organization. If so, consolidate any programs and processes that you can.

2. Understand your Capacity Limits

Calculate how many workable hours your workforce actually has to deploy. If you have 10 workers who each work 40 hours per week, you’ll have about 1,600 hours per month to work with. Don’t forget to make allowances for sick/vacation time. Determine which projects are the most important to the health of your business and ensure your top performers spend their time there.

3. Analyze Employee Classifications

Next, examine your employees’ current classifications and determine whether they are on the cusp of becoming eligible for overtime. If so, calculate their “break even” points and get a sense of where your cutoffs might be. Is it better to proactively raise their annual salaries or wait and see how the overtime costs roll out?

4. Invest in a Robust Time Tracking Software

Investing in time tracking software will provide you with the transparency you need to understand your operating costs at a glance. You may need to spend time socializing the idea to workers, but when time worked is consistently entered into a tracking system, it becomes invaluable in your decision-making. The best software solutions include workforce planning capabilities. Knowing accurate project costs and how many hours you're dedicating to projects can help you mitigate any risk of overtime.

Position Your Business for Success

When the new DOL rules eventually hit, organizations who have not sufficiently prepared will be at risk of financial instability. Companies that continue to thrive once the new rules are implemented will be those who take an unflinching look at their costs, budgets, and workforce. If you plan ahead, you’ll be aptly positioned to meet federal standards, stay compliant, and still remain profitable.

Rachmany sums it up nicely, “preparing for the worst is an essential factor in achieving success when the future is so unpredictable. There is no doubt leaders will run into extremely tough challenges…still, with a plan in place, these challenges can be overcome and lead you to success.”