Overtime Rule Has Small Employers Re-Examining Benefits

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Kristen Ricaurte Knebel

June 1 — Small employers may be taking a second look at employee benefits in light of a new overtime rule that will double the salary threshold for overtime exemption, groups and attorneys told Bloomberg BNA.

Employers may consider ways to avoid having employees work overtime, but “if a business decides it’s going to absorb the cost increases of the overtime rule, they’ll have less money available for benefits,” Daniel Bosch, senior manager for regulatory policy at the National Federation of Independent Business, told Bloomberg BNA June 1.

On May 17, the Department of Labor announced its final rule on overtime, which will double the salary threshold for overtime exemption to $47,476 per year, or $913 per week.

Tammy D. McCutchen, a principal at Littler Mendelson PC in Washington, told Bloomberg BNA in a June 1 e-mail that some of her clients are considering “offsetting the increases in salary or overtime pay by decreasing company paid benefits.” This includes increasing employees' health insurance premiums, cutting life insurance benefits and decreasing bonuses, she said.

“Benefits will definitely be on the table for many companies,” McCutchen said.

Retirement Plans

“Small employers typically are not as generous in their employee benefit offerings as large employers. Some very small employers don’t offer 401(k) or retirement plans, but if you have an employer who is offering those things,” the new overtime rules “could impact that,” Leonard Sanicola, senior practice leader for WorldatWork, told Bloomberg BNA June 1.

Michael L. Hadley, a partner with Davis & Harman LLP in Washington, told Bloomberg BNA June 1 that now that more employees will be eligible for overtime, there will be more compensation subject to benefits. If a retirement plan includes overtime in its definition of compensation, costs increase for employers, especially small ones, he said.

“Small businesses tend to use standardized definitions of compensation, which would tend to include overtime, as opposed to a large employer who may have a more tailored definition,” Hadley said.

Small employers also tend to use more “standardized” retirement plan designs, such as SIMPLE individual retirement accounts, and to use model plan documents, Hadley said.

“So they tend to have less flexibility to decrease their retirement plan cost in response to a change like this to the overtime rules,” he said.

Employers have some options when it comes to dealing with increased costs, he said, including modifying an employee's hours to avoid overtime, or limiting overtime hours.

There is another wrinkle in this new overtime equation and that's that states are ramping up their retirement plan initiatives by establishing payroll deduction individual retirement accounts for private-sector workers (12 PBD, 1/20/16).

Hadley said that offering retirement plans can be expensive, so smaller employers may opt not to offer plans themselves. In states that have automatic IRAs, employers must automatically enroll employees, but there isn't a requirement for the employer to pay in, so they won't incur any extra costs, he said.


Because some employers have different levels of benefits for overtime-exempt employees, such as more generous paid time off and profit-sharing, those benefits may get a second look as well if employers reclassify workers, McCutchen said.

“If a company reclassifies employees from exempt to non-exempt because of this rule, they will need to decide whether the employees will continue to receive such benefits,” she said.

However, if they do that, they will need to look at eligibility requirements in the plan and make any necessary changes, McCutchen said.

“Changes to the eligibility provisions of ERISA qualified plans may need Board of Director approval,” she said.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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