New federal overtime rules, part 2

The recent changes in the Federal Overtime Rule have not only raised the salaries of many non-exempt (paid hourly) but also have changed the rules for overtime payments as well. Under the new rules, any employee who does not qualify for as exempt from overtime rules will be considered a 40 hour per week employee, which means that any hours they accrue over the 40 hours will need to be paid at the overtime compensation rate of one and a half times their hourly wage.

Workers who rely on tips for part of their pay will have their overtime calculated based on the minimum wage rate. The new rule also prevents employers from offering comp time, meaning they can’t have employees work over 40 hours one week and fewer hours the next week without paying them overtime they are owed in the previous week.

Does the new rule affect independent contractors?

Individuals who fall under the classification of independent contractors are not subject to the Fair Labor Standards Act (FLSA). Because of this, they will not be eligible for overtime pay. Employers do need to exercise caution when classifying workers as independent contractors, though. Doing so just so that they can avoid possible overtime payments, when they meet the criteria to qualify as an actual employee, can cause compliance issues.

Will the new rule affect retirement plans?

There is a chance that the changes to the Federal Overtime Rules may have an effect on retirement plan costs and non-discrimination testing, as well as other employee compensation packages. When the sponsors of the retirement plans are paying out more in overtime to the employees, both the defined benefit and the defined contribution definitions of earnings may see an increase in costs. In some cases, the ten percent increase in wages will result in a ten percent increase in deferrals and the employers matching contributions.

While nondiscrimination testing for retirement plans is not likely to affect many employees, there be may problems with the testing if the plan excludes the overtime pay from the amount used to determine benefits, but chooses to include the total overtime pay in the nondiscrimination testing process.

What is the possible impact on health plans and fringe benefits?

Another benefit area that may see the impact with the updated rule is employer-sponsored health plans and other fringe benefits. One of the main results of the recently changed rule is that previous exempt employees may have their status changed to non-exempt. Employers will need to check the eligibility requirements of their health and fringe plans to see if the changes from an exempt to a non-exempt employee will affect coverage or benefit requirements. Many benefits, such as adoption or education assistance, or even group life insurance, may be affected by an employee’s status. If this is the case and more employees become eligible, an employer could face a significant increase in cost, upon implication fo the status change.

What will be the overall effect of the Federal Overtime Rules?

According to the department of labor, it is estimated that possibly more than one million employees will be affected by the new regulations. The resulting change could cost employers across the country more than $460 million. While the new rule will not affect all workers, in some companies the effect could be significant enough to cause catastrophic changes in payroll or employee benefits.

How the new rules will affect your company will largely depend on the type of workforce and current compensation provided to employees. For companies that are facing a more significant impact, time is of the essence. Analyzing your company workforce now will help you to better account for and prepare for the changes that will be in effect in just a few short months.

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