New overtime rules force hard choices for employers

For Purdue University—the state’s eighth-largest employer—new overtime rules could mean an $8 million or so hit to the school’s already-stretched budget.

That’s because the university has about 1,200 employees who are considered managers and aren’t eligible for overtime pay but earn less than $47,476 a year, the new federally mandated minimum salary for such workers.

And Purdue isn’t alone.

An estimated 87,000 Hoosier workers will be affected by the change, which means companies big and small across the state could be making significant investments in their workforces this year as they weigh a variety of expensive choices to comply.

The rules raise the salary threshold under which white-collar, management workers are eligible to receive overtime pay from less than $24,000 to more than $47,000.

Employers have essentially three choices: They can bump exempted workers’ salary to at least $47,476 by the Dec. 1 deadline. They can make sure salaried workers who earn less don’t work more than 40 hours per week. Or they can transform them into hourly workers who receive extra pay for extra work.

At Purdue, raising pay for all affected exempt employees would cost $7.8 million a year. If the university decided to move the same group to hourly status and pay them overtime, it would cost $8.3 million a year based on five hours of extra work per week.

Holding salaried employees to 40-hour work weeks won’t cost the school more, but it means some work won’t be done.

“Right now, the only thing that is clear is that there will not be a single one-size-fits-all response,” said Trent Klingerman, Purdue’s vice president for human resources. “Of course, our primary goal is to treat employees fairly and make reasoned decisions based on the work that they do and the manner in which they do it.”

In most cases, Klingerman said, the university will have to manage workloads carefully in order to avoid overtime hours.

The new rules are expected to affect 4.2 million workers nationwide, according to the White House. More than half are women—55.6 percent—and just under 40 percent have bachelor’s degrees. More than half are age 25-44.

Critics, meanwhile, are betting on a congressional challenge that will void the changes.

If lawmakers don’t act, the steep bump in the salary threshold will create some tricky circumstances for companies—especially small businesses—to navigate in a short amount of time, said Elizabeth Malatestinic, senior lecturer in human resource management at the Indiana University Kelley School of Business.

“It’s unfortunate they’ve waited 12 years to make changes,” Malatestinic said. “That’s a lot to ask of employers.”

While it seems the simplest option for employers is to raise salaries to the new threshold to avoid paying workers time and a half, that choice could bring unintended consequences.

“Wage compression commonly occurs when employers are trying to be more competitive, so they raise their starting wages but they don’t raise the wages of people they already have on board, and those people are not happy about it,” Malatestinic said.

Employees might also be more pressured to report their hours, which could affect telecommuters and the overall morale of salaried employees, Malatestinic said.

“There’s a freedom in being a salaried worker and being trusted. But I think if people start making more money, they’ll adjust to the idea quickly.”

Some of Indiana’s largest employers say they are still assessing the rules’ impact.

Indiana state government, which has 28,000 employees and ranks as the fourth-largest Indiana employer, according to IBJ research, has been preparing for the changes since last July. But Indiana State Personnel Department spokeswoman Ashley Hungate said it is “still analyzing actual impact.”

“Once plans are finalized, [the department] is notifying impacted state government managers and employees, as well as providing training to ensure compliance,” Hungate said.

Elkhart’s Thor Industries plans to “view the new overtime rules as we would any other change in law or regulation,” spokesman Jeffery Tryka said.

“We have not disclosed the number of our salaried employees affected by the change in overtime rules; however, we would not expect the new rules to result in significant changes to our workers,” Tryka said.

Walmart, FedEx, Indiana University Health and Cummins Inc.—all among the top 15 employers in Indiana—said it was too early for them to know how the rule will affect them.

“We are looking into this now and evaluating how we will adjust if and where needed,” said Cummins spokesman Jon Mills. “That being said, we want to do what is best for our employees and the company.”

The regulations will have “essentially no impact” on Eli Lilly and Co.’s workforce, said spokeswoman Janice Chavers.

At higher education institutions, teachers, graduate students and academic administrative employees such as department heads are exempt from the rules. But non-academic administrative employees will be eligible.

Ivy Tech Community College has about 500 exempt staff members earning less than $47,476, said spokesman Jeff Fanter.

“We are currently digesting the details of the new ruling and a recommendation for implementation will be prepared for college leadership in the coming months,” Fanter said.

Meanwhile, critics of the rules have also mounted a campaign against their implementation.

Grant Monahan, president of the Indiana Retail Council, said the changes are a “career killer for people in the retail sector.” The National Retail Federation said the Obama administration is “singling out” the retail sector with the rules, which it said would “likely harm managers’ career paths and undermine the quality of customer service they are able to provide.”

“There’s still lot of questions about the impact,” Monahan said. “I think retailers are sort of weighing the impact and laying the groundwork to ask Congress to nullify the rule.”•

This article ran in the June 4, 2016, Indianapolis Busines Journal.