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September 19 2016 // 5:00 AM

Opinion: The New FSLA Act and How it Affects Employees, Employers, and Tax Payers

Written by Jared Perry | @PAEVENjared

Opinion: The New FSLA Act and How it Affects Employees, Employers, and Tax Payers

By now you’ve probably heard of the new Fair Labor Standards Act (FSLA) Overtime Rule. If not, I suggest you take a peek here. Once you’ve had a chance to see what the new mandate is and what it is meant to accomplish, I will walk you through how this new law will affect your company, its employees, the tax payers, and the general public. I will also give you an inside look at how we will be handling this new law in my consulting firm.

According to the Department of Labor, this “long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.” Where I tend to have a little heartache is the notion that a company that has run itself $19 trillion in debt is now telling me what I have to do with my company. Realistically, if you think about it, do you seek out failed business owners and implement the same things that forced them to go belly up? I think it’s a pretty fair assumption to say that you do not. Now, to be fair, I do not doubt that the intent and spirit of the law are in good faith. However, the execution, due diligence, outcome, and publication of the law has been completed in a manner that will not serve the tax-paying public as intended. 

To understand where I’m coming from, let’s lay some groundwork. The first things I want to show you are the numbers. Numbers are quantifiable and give you the closest opportunity to view something through an unbiased lens. For my examples I am assuming all affected individuals will be applying single status. So to start out, let’s take a look at the numbers:

The Numbers
 

  •  According to the US. Department of Labor

    • Previous salary threshold = $23,660

    • New salary threshold = $47,476 [Effective December 1, 2016]

    • 4,000,000 full-time employees affected [~3% of full-time working population as of 7/1/2016]

  • According to the Internal Revenue Service

    • Federal Tax Bracket for the affected income groups [2016]

    • 15% ($9,275 - $37,650)

    • 25% ($37,650 - $91,150)

  • According to Taxfoundation.org

    • Distribution of affected workers based on gross income groups

    • 68% of workers between $20,000 and $30,000

    • 24% of workers between $30,000 and $40,000

    • 8% of workers between $40,000 and $50,000


The Results

Taking the above information, we can start to draw some conclusions. For starters, from the 4,000,000 workers affected approximately 86% earn less than $37,650 annually (the next tier of tax bracket at the Federal level). This means that approximately 3,440,000 workers will now have their taxes increased from 15% to 25%. To be fair, though, they will enjoy a net bump in their salaries as shown in the table below.

FLSA-image.jpg

Utilizing the above table and the numbers provided earlier we can see that this accounts for increases in annual take home pay for American workers as follows:
 

  • Previous salary between $20,000 and $30,000

    • Average net annual increase of $16,700

  • Previous salary between $30,000 and $40,000

    • Average net annual increase of $9,500

  • Previous salary between $40,000 and $50,000

    • Average net annual increase of $2,500


Accounting for the above increases in take home pay for the worker within each category, businesses in the US will need to pay out an additional $69.5 billion each year to employees who did not gain an extra skill or achieve an additional certification. Again, this is a mandated raise in base salary. Advantage to the employee for sure. The other winner of this law is the Federal Government. You see, if an employee is paid more, their tax bracket goes up. A higher percentage of a higher salary is a higher intake in tax revenue. This leaves Uncle Sam with a net revenue increase of $14.1 billion each year due to federal taxes. The other forgotten twist is that Social Security and Medicare is paid by the employee and the employer. When taking those welfare taxes into consideration this means that Uncle Sam will also rake in almost $8.6 billion annually for Social Security and another $2.1 billion annually for Medicare. If you’re keeping track, that totals up to employers paying out a total of $74.9 billion per year in additional monies for no added value or benefit to their companies. All the while, Uncle Sam is the proud new owner of $19.5 billion in revenue – all with just a stroke of the pen.

Who truly pays the price?

For starters, we have to realize that this law is intended for “white collar” employees (as described by the US Department of Labor). This classification relates to exemption status for positions such as executive, administrative, professional, outside sales, and computer-related employees. Such industries include hospitality staff, retail staff, and professional services staff, including, but not limited to, medical, legal, financial, architectural, engineering, and construction. Using logical thought progression, one would surmise that anyone using the above mentioned services will need to be prepared for increased costs of goods and/or services in those industries. Compound that with the fact that not only will the consumer be paying more, but they will be doing so for no added value to the good or service. You will just simply pay more.

So is it all just about taxes and paying more? I will leave that for you to decide once I present the other possible outcome. You see, despite the concerted effort of the Federal Government to find new and inventive ways to tax American businesses and “white collar” employees, the above scenario is not very likely to happen.  Here’s why: this new FLSA law affects full-time salaried employees. The easiest option for an employer would be to convert affected salary employees into hourly employees and pay them time and a half for working overtime. Or worse, they could hire two part-time employees to cover the old position of one full-time employee. Now not only do we have approximately 4,000,000 employees getting paid less, but since they are part-time employees they have no guaranteed rights to company sponsored health care benefits. That’s in stark contrast to the net raise in base salary we discussed earlier. Unfortunately, this is how I believe most companies will opt to handle this mandate. Businesses just aren’t going to settle for making less money. Most will not be able to increase their prices proportionally because our economy is global. No other country in the world has mandated labor laws of this magnitude so American businesses are put at a competitive disadvantage. Therefore, we have to keep overhead as lean as possible. What started out as an idea to put extra money into employees’ pockets will turn out to cost some their job and/or their health benefits.

I believe employees need to be made aware of why business owners will be forced—and I use the word forced on purpose—to make the decisions they will make. I feel strongly that the first half of this article discussed what the intent of the law was and the second half expressed what the reality of the law will be. 

So how will our consulting A/E firm handle the new FLSA law?

The first step for us was to identify where and how this law affects our current pay scale system. As it turns out, of the six professional level tiers we have, only one of them is affected. Our employees are all compensated with base salaries and are eligible for bonuses in the event the company reaches a certain pre-tax margin (PTM). This particular professional level accounts for approximately 10% of our employees. It should also be noted that all of our employees receive 100% of their medical, dental, and vision insurance at zero cost to them. The company handles this expense as part of their compensation package regardless of professional level. 

Moving forward, effective December 1, 2016, we will be converting our affected salary pay range to an hourly compensation plan. Our goal is to work employees at the same levels as before, however overtime work will not be allowed as we do not bill “premium” time to our clients. Because we will not be able to recoup increased premium costs through our clients, overtime will either be handled by higher salaried individuals or the addition of part-time employees. Each employee in this pay range will have to ensure they work 30 hours per week regardless of their utilization in order to maintain eligibility status for our company sponsored health care benefits. For the employee in this pay range to be eligible for our company PTM bonuses they will need to work a minimum of 40 hours per week regardless of their utilization. 

On the surface our approach is an even swap from salary to hourly with the employee now being at the direct mercy of the company workload. In the event we fall off or have a down month or quarter, these individuals will only be asked to work the amount the company needs. This not only affects their take home pay, but also potentially their health benefits and PTM bonuses. In addition to the short-term challenges mentioned above, this mandate has also prompted us to consider future recruiting and hiring procedures. In doing this it has become evident to us that a third option exists which is to effectively not have an “entry level” pay range at all. This would eliminate those individuals with 0 -3 years of experience in our firm. Some could argue that our costs would increase. However I would counter in saying that there would also be increased benefit and value to the company for that individual. 

Conclusion

Regardless of how your company handles the new FSLA law, I hope that the considerations I’ve laid out in this article have spurred you to truly take a closer look at how hot-button topics like this affect everyday businesses and tax payers. When evaluating this mandate for our business we took the time to find the solution that worked best for us, but I am positive there is no one-size fits all solution, and to be clear—there never is. Employers of all shapes and sizes will handle this law differently.

As a workforce group, I believe this will mostly affect GEN Z and Millennials. As a whole this group has shown they are willing to move around more often in their careers, which might make this transition easier than it would for Baby 
Boomers. For this reason, I do not see a huge impact on the way the majority of employees feel they are being treated. Those who prefer money over free time will find those companies who have adopted those principles, and they will have to work accordingly to garner that lifestyle. Those who prefer free time over money will have to find companies who incorporate those beliefs into their work environment. 


Takeaways:
    
1.    In a perfect world the new FSLA law would afford the Federal Government a revenue stream of $14.1 billion annually while costing American businesses $69.5 billion each year.

2.    We do not live in a perfect world, thus employees within the affected pay ranges should anticipate businesses converting or altering their salaried positions to an hourly compensation package.

3.    As a whole, GEN Z and Millennials will be the target workforce group that is most affected by executing the new FSLA law.


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Comments | 2
    Comments
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