When the Affordable Care Act was passed a few years ago, I did a pretty good job of learning the bare minimum of how the taxation associated with the new law would affect my clients. Since I don't really have any clients with 50+ employees that didn't already have a dedicated HR professional at hand, I mainly focused my education on the Net Investment Income Tax and the Additional Medicare Tax, and helped my clients plan accordingly. Now, I have been faced with a new beast, the Fair Labor Standards Act, which affects all employees and employers, regardless of size. In response, I have gotten up to speed and want to pass along a few tidbits to you now.
First, a little background. The Fair Labor Standards Act ("FLSA") was designed to ensure that salaried employees that work variable hours are paid a fair wage. Hourly employees are by default paid a fair wage, because they must be paid at least a certain amount per hour (the minimum wage) as well as 1.5x that rate for hours worked in excess of 40 (the standard American workweek). The FLSA helped protect salaried employees that are paid the same amount regardless of the number of hours they worked. Up until 2016, the minimum salary was $23,660 and if an employee worked more than 40 hours in a week, no overtime was due.
Beginning December 1, 2016, the minimum salary under FLSA rules has increased to $47,476 per year (101% increase). That is quite the jump. As always, there are several exemptions and caveats that go along with the rule, but I will discuss in generalities for the purpose of this article. The point of the new rule is to even the playing field for salaried employees and to distribute wealth from the employer to the employee. In practice, beginning December 1, salaried employees that make less than $47,476 must either be raised to that level or be compensated for hours worked in excess of 40. Now let's look at some of the possible repercussions of this move.
Everyone is an hourly employee
The response of several employers will be to convert all of their employees that currently don't meet the salary threshold to hourly employees. This is a lose-lose scenario because not only have you implemented a burden on the employer to track more hourly employees, but you have also taken away the benefit of being a salaried employee from the employee. By doing this, you also bring into play other intangible effects on an employee that might or might not need to be tracked on an hourly basis. For example, if I am a salaried employee and I check my work email on my couch and spend ten minutes responding to emails at 8 o'clock at night, should I be compensated for those hours? As a salaried employee I would think "no!", but under the new FLSA rules, the answer is "yes".
Nondiscretionary bonuses
Let's look at the commission sales field for a moment. Typically, an employee paid on a commission basis will have a very low base salary which in turn motivates the employee to work hard selling cars, widgets, whatever in order to make more money. Under the new rule, nondiscretionary bonuses (commissions) can only make up 10% of the employees salary that satisfies the FLSA wage base. In effect, the salespersons base salary will have to increase, which means they will either work hard to make more money or work less to make the same amount. Which would you choose?
Loss of other benefits
Let's say I am an employer and I am reviewing the new FLSA rules and I realize I have to give an employee a $5,000 raise in order to meet FLSA requirements, but I also pay roughly $5,000 a year to subsidize some of their health insurance. Guess what? Bye bye health insurance plan. And I don't have to feel bad about it because there is this wonderful thing called the Affordable Care Act which gives my employee the opportunity to go down to the Exchange and get health insurance without worrying about preexisting conditions, etc. In the end I, as the employer, am out zero cash, yet the employee is out their great group health insurance coverage. The same can be said about HSA contributions, 401(k) profit sharing contributions, or even paid parking. This is a terrible scenario, but it must be mentioned in our discussion of how the new FLSA rules might not be fair.
In closing, government regulations cannot force businesses to give their employees more money in a capitalistic society. I saw this firsthand in 2008 and 2009 when the US economy crumbled. Employers laid off 30% of their workforce in order to stay afloat, then figured out how to do more with less, and never hired people back once the economy rebounded. The goal of the new FLSA rules are to pass more wealth down from employer to employee, but I'm afraid what will happen is the same amount of wealth will be passed down to less people. This will result in more Americans filing for unemployment and other benefits, leading to a recession and ultimately higher taxes (to pay for all of the benefits). I'm all about a fair shot for everyone, but it can't be forced. Employers that consistently pay their employees $30,000/year to work 65 hours a week with no bonuses or overtime should be sought out and punished. But employers operating in that environment are few and far between. The new FLSA rules are yet another example of how a few bad apples will cause good employers to make decisions they never thought they would have to make.