Employee benefits plans emerge as overtime pay traps

While employers now have had time to swallow the new overtime pay pill, the next adjustment relates to employee benefits.

Take, for instance, professionals earning a $40,000 salary in the creative or media fields whose employer shifts their wage schedule to hourly with time and a half overtime pay as the law prescribes. The move may directly affect the employee’s benefits plan – an emerging aspect as employers scurry to legal counsel and benefits consultants to prepare for the U.S. Department of Labor’s Dec. 1 change to more than double the overtime pay threshold to $47,476.

“Their whole benefits structure is kind of the hidden gotcha in this thing,” said John Hammons Jr., a partner with employment law firm Ellis, Ellis, Hammons & Johnson PC. “If they make them hourly, they have to make sure the definition of their benefits is changed to make sure people don’t lose benefits.”

Benefits consultants say workers could find themselves stuck in the tension of their employers deciding between increased pay and decreased benefits.

“The greatest concern is that both health costs and compensation are increasing,” said Chris Ratajczyk of Arthur J. Gallagher & Co., via email from his office in Lincolnshire, Ill. “To maintain the same profit margin, something has to give.”

Ratajczyk works with Jacob Salinas, Gallagher Benefit Services’ area vice president in Springfield. The insurance firm’s human resources and compensation consulting division is getting hired for compensation and job reclassification studies, including a recent job for the city of Fayetteville, Ark.

Salinas said the days of storing compensation and benefits in separate silos might be moving on.

“There has been a migration and metamorphosis in looking at the entire package collectively and integrating them into a total rewards strategy to make sure the right balance is being struck and employer funds are being allocated in the right buckets,” Salinas said.

The friction
The telephones at HR Advantage are ringing daily from clients with overtime pay questions, said owner Lynnette Weatherford. She’s also presenting at more seminars, most recently Connell Insurance Inc.’s annual workers’ compensation conference July 15 in Branson.

Weatherford said she understands the friction between employees and employers.

“An employee might do a victory dance because, ‘Finally, we’re going to be paid,’” she said. “They should be happy because maybe they’re getting a pretty good pay raise. Unfortunately, employers are seeing this as a direct hit, expense wise. It’s been mandated, but there’s no assistance.”

A resolution she sees possible comes by dividing an employee’s annual salary by the number of hours worked each year – at 40 hours a week, it’s 2,080 hours per year – to arrive at a new hourly rate.

“The majority of companies I work with it seems that’s the calculation they’re working with,” she said. “I’ve had employers do a great job tracking hours, and they’ve calculated what the overtime might be and combined with hourly rate, they come to a happy medium.”

Attorney Hammons isn’t convinced the new rule will move the pay dial as much as it’s intended.

“It’ll be interesting to see if it actually has an effect on increasing wages,” he said. “So many people haven’t budgeted for this, and small employers can’t really afford that big of an increase.”

He cautions employers of selectively choosing staff members to pay hourly.

“If you have 10 people performing the same job, it’s difficult to treat five as exempt and five as hourly,” he said. “It affects more people than employers originally think it does, because of seniority and experience maybe.”

Weatherford said such moves that misclassify occupations could prompt federal audits. Certain industries also will be on the DOL’s watch list, she said, pointing to banking, restaurants, hotels and transportation companies.

“They’re going to be targeted by auditors,” she said. “The Department of Labor will have them on their radar to make sure they made the switch and they are classified correctly.”

Beyond payroll
The initial shock of the employee pay rule may have left some companies with a deer in the headlights look. Ratajczyk, who directs Gallagher’s human resources and compensation consulting, said some clients have stopped short of thinking beyond payroll.

“For example, one client hadn’t thought about the fact that paid time off was accrued differently for exempt and nonexempt employees,” he said.

But now is the time for employers to press through to the greater implications of the law.

“It’s helpful to model scenarios that include compensation, benefits and other rewards, so that we can find opportunities to shift costs in a strategic way that won’t detract from, and could possibly help achieve, organizational goals,” he said.

For most, the consideration of employee benefits quickly becomes a talent recruitment and retention conversation. Consultants advise employers to develop new strategies to maintain production volumes and profit margins.

“That could be automating more roles, reviewing how employees are scheduled, innovation and/or rebalancing the rewards mixture,” Ratajczyk said.

Timing also is an issue. Even though the Fair Labor Standards Act changes have been discussed for months, the benefits portion throws a wrench in the schedule.

“With the plan year changes usually in effect Dec. 31, even if we change our benefits at the end of the year, we’re still going to have a month gap,” Hammons said. “The easy change of making people hourly could be that hidden problem if you don’t address it all at the same time.”