Wage Compression Likely to Increase Under New FLSA Ruling

By Christie Summervill

Wage Compression Likely to Increase Under New FLSA Ruling

Federal Court Preliminarily Halts Overtime Rules With Last-Minute Ruling

In a dramatic last-minute development, Federal Judge Mazzant, on November 22, blocked the U.S. Department of Labor’s (USDOL’s) overtime rule from taking effect on December 1. Agreeing with arguments posed by concerned states and business groups, the judge issued a preliminary injunction preventing the rules from being implemented on a nationwide basis.​​

The fate of the overtime rule is now uncertain. The Trump administration will take over the USDOL in less than two months’ time, and the incoming administration has repeatedly indicated that it wants to eliminate unnecessary regulations hampering the business community. Unless an appeals court reverses course in the next several weeks, it is quite possible that the rules will be further delayed, completely overhauled, or altogether scrapped once President Trump takes office.

Some employers might find themselves in a difficult spot. If you have already made alterations to your compensation plans or to your employees’ exemption status, it ​would impact employee morale to reverse course now. Although you may have the legal right to revert to the status quo depending on your circumstances, you might consider waiting until a final decision is reached in court, Congress, and the White House before doing anything further.

If you had been waiting until December 1 to implement the changes, you have the option of putting any alterations on hold and awaiting a final determination on the fate of the rules. If you do so, you should communicate to your workforce that the expected changes are going to be delayed given today’s court ruling, and let them know that you will continue to monitor the situation and make adjustments when and if appropriate.

In light of the new FLSA rulings, it will be easy for organizations to become quickly focused on the cost structure and the financial impact of expanded overtime pay. Early instincts may be to make some modifications to pay structures; i.e. changing exempt salaried employees to non-exempt hourly employees. Companies can protect their bottom line and salary budget this way without giving in to the new annual salary minimum of $47,476.

We expect that this practice will be going on across the country, regardless of industry, so perhaps employees will see it as the new normal. This shift, however, may bruise the ego of employees who considered being exempt something that validated the importance of their position. Punching a time clock makes them feel less respected. There’s also no denying the comfort a salary provides, as it comes with an inherent sense of security. An employer can cut hours easily, but negotiating a salary is more complicated. Leadership must balance the financial gain against the cost of reduced morale or even costlier turnover.

There are less obvious, but still significant, consequences of this ruling to consider, such as wage compression. If you move a pay level of an employee up to the $47,476 minimum for exempt employees, while their manager is earning $52,000, you could be demotivating those in management.

Supervisors may wonder if the negligible difference in pay is worth all of the additional responsibilities they carry over their near peer in salary.

This makes it more important than ever to ensure employee pay levels are competitive to market for the amount of experience they have in that position.

For banks and credit unions, this FLSA raise will primarily affect positions like front-line supervisors, branch managers, credit analysts, trainers, and marketing specialists…and their managers.

The Bottomline: The Ripple Effect Will Mean Making Adjustments Up The Line

As the ripple expands, salary administration guidelines will need to be rewritten, as will an internal communication plan, ahead of the December 1 deadline. This ruling will impact where in the salary range a new hire will start based on experience and how long it should take them to have a pay level near the midpoint.

For example, we recommend that if you hire an employee with a solid background, but no real experience in the position, that they start with a pay level around 85% of midpoint. This helps you to avoid the “I’ll take this job until something better comes along” folks. But if the job is classified as exempt and you now have to pay them $47,476, that may already be pretty close to the midpoint. This could impact how much they can expect for a salary increase at future reviews.

It also remains to be seen which of the many other unintended consequences will result from this ruling.

  • More overtime being paid to employees
  • An increase in part-time jobs
  • Higher wages as pay levels are bumped up to meet the minimum threshold
  • More salaries bumped up to correct wage compression
  • Benefits lowered to make up for all of these costs
  • Increase to 401K contributions
  • While everyone agrees that a wage correction was long overdue, the one who will realize the greatest gains is the government’s increase in payroll taxes.

There has never been a single sweeping legislation that has resulted in a larger filling of the tax coffers.

This, on the heels of the Affordable Health Care Act’s impact to employers, will send this administration off as either the most pro-employee or anti-business administration…depending on your political persuasions.

Here are 3 important next-steps for you as an employer:

  1. Identify which positions are likely to impact and if the position is going to remain exempt.
  2. Develop and communicate a new compensation plan and reclassification with the employees and supervisors.
  3. Update your salary administration guidelines — and feel free to ask us for help should you need it!

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