Major Overtime Change Will Deeply Affect Employers

According to a Department of Labor release, a newly issued rule increases the salary threshold required to exempt a salaried bona fide executive, administrative or professional employee from federal overtime pay requirements.

The release states, "Effective July 1, 2024, the salary threshold will increase to the equivalent of an annual salary of $43,888 and increase to $58,656 on Jan. 1, 2025." The present annual salary threshold is $35,568. "Starting July 1, 2027, salary thresholds will update every three years by applying up-to-date wage data to determine new salary levels," the release says.

What does this mean?

In an explanation of the new rule, the DOL gives background on overtime regulation. In brief, the venerable Fair Labor Standards Act of 1938 set rules for minimum wages and additional payment for overtime. However, certain groups have been exempt from the overtime provisions, particularly those falling into the so-called EAP group (executive, administrative and professional employees).

An employer can't simply decide employees fall into the EAP group, however. Employees must meet the following three criteria:

1. They must be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed.

2. They must be paid at least a specified weekly salary level.

3. They must perform primarily executive, administrative or professional duties, as provided in the DOL's regulations.

The new rule ups the figure for criterion No. 2. As of July 1, that weekly pay is $844, equivalent to the $43,888 annual figure noted above. The big takeaway for employers is that employees who do NOT meet the new salary levels are entitled to overtime after 40 hours/week. This is true even if they meet criteria No. 1 and No. 3. In short, it is now harder for employers to classify workers as belonging to the EAP group.

Just the beginning

So is that all you need to know? Actually, no. There are additional provisions and exceptions, as well as changes to the important "highly compensated employee" limits. The rules have always been complicated, and these changes do not simplify anything. Indeed, the new published rule runs more than 300 pages — more words than Charles Dickens' "A Tale of Two Cities." Also, your state may have additional overtime rules.

For now, the two takeaways are:

1. Open your payroll files because there's a good chance you'll have to make changes.

2. Call your payroll advisers to go over your situation.

If and when the DOL publishes more guidance, we'll certainly follow up.

What Will Work Look Like in the Future?

We've all seen the headlines: "Everyone will work from an office by 2026." "There is no going back from hybrid and remote." "AI and Web3 will change everything." What is a business owner to think when the experts have conflicting predictions?

Well, there is no one answer for everyone. Many businesses, including manufacturing, health care and brick-and-mortar retail, will always need people to work on-site (even if some job categories allow for remote work at least part of the time). Other industries, such as software development, advertising, accounting and law, can operate with no one on-site.

But that is just the beginning. The very concept of what it means to work is being challenged by generative AI and Web3. Thus the question becomes what will work best as a long-term solution for each particular business.

To understand how and to what extent generative AI and Web3 may affect your business, let's look at some definitions.

Automation versus generative AI

"Automation" and "generative AI" are often used interchangeably, probably because they both help businesses work smarter and more efficiently. But there are key differences between the two:

• Automation follows a set of predefined rules. A specific command is followed by a set response. There is no deviation.

• Generative AI responds by using algorithms that can change over time based on the information AI learns over time. AI continues to improve its performance and its decisions.

Companies have been using automation to create efficiencies since Oliver Evans developed the automatic flour mill between 1775 and 1790; that mill is considered the first completely automated industrial process. Automation has evolved since then. Today, automation refers to the use of technology to automate repetitive tasks and reduce errors.

Modern AI has been around since the 1950s, but it really captured the popular imagination when Open AI released ChatGPT. Most businesses are now using AI in one form or another. While some studies say AI is more likely to enhance job roles than to eliminate them, other studies say that AI will replace thousands of jobs. The likely result will be somewhere in between, with some current jobs disappearing but others that we cannot even envision today being created.

Generative AI and Web3

In the midst of simultaneously exciting and frightening AI disruptions comes another equally disruptive change: Web3.

Web3 is often associated with the metaverse, cryptocurrencies and NFTs, but it is much bigger than that. At its core, Web3 is a collection of blockchain-powered technologies — digital systems that operate without a central authority, allowing individuals to work directly with clients without going through a gatekeeper. The rise of the gig economy (freelance, project-based and temporary work) mimics this model. At its best, Web3 has the potential to empower individuals.

Businesses cannot afford to be complacent

The effect of AI and Web3 on the future of work cannot be overestimated. Businesses cannot afford to ignore the profound impact these developments will have. For example, a 2023 Earth Web article states that 75% of 6- to 17-year-olds aspire to be YouTubers rather than traditional workers. Even if these results are not representative globally, the future workforce overwhelmingly prefers a work model that is vastly different than the traditional pre-COVID-19 model. Even the evolving post-COVID-19 model, with its focus on hybrid and remote work, does not currently project what these future workers will want.

Now is a good time to consider how AI and Web3 can become successfully integrated into your business.

Creating an Equitable Compensation Plan

Compensation comprises such elements as wages or salaries, benefits, union perks, employer-provided vendor discounts, work flexibility and paid time off. A company's compensation plan can promote employee engagement, performance and career development; thus, a thoughtful compensation plan boosts recruitment and retention efforts.

Compensation is tied to critical business elements, including:

• Business goals and budget

• Industry average salaries

• Operating needs

Yet employees sometimes feel that some aspects of direct compensation — pay, bonuses, commissions, stock — are arbitrary and possibly even subject to bias. How can your company ensure that its compensation promotes equity and treats people fairly?

Start with a philosophy

The first step to creating or updating a wage and salary schedule is to have a clear philosophy. What does your company value? How does it express those values? A strategically designed compensation philosophy describes the company's overarching position on compensation and aligns that position with the business strategy to hire, retain and reward top talent.

Once you have defined your compensation philosophy, you can add three more pillars to your compensation policy: job architecture, performance management and incentives. Develop guidelines for these, focusing on equity.

• Define roles, levels of responsibility and pay within the company hierarchy. Assess how the pay hierarchy will affect the company budget.

• Define how performance will be evaluated.

• Offer opportunities for career advancement by developing seniority grades within each job classification; at the very least, there should be entry-level and senior roles, and ideally positions in between.

• Decide whether you will offer incentives — bonuses and/or equity compensation — to encourage performance and stimulate productivity.

• Budget other benefits. Although not strictly compensation, health insurance, retirement plans, disability income protection, paid time off, paid holidays and flexible work policies are among the basics offered by many companies. Some companies additionally offer assistance with child care expenses or commuting, offer employee relocation packages, provide a company car or supply equipment such as laptops and mobile phones.

Other considerations

In structuring your company's compensation plan, you may also want to weigh:

• Local versus national salaries. What is fair in your region and competitive in the local market may not translate if your company grows.

• Traditional versus innovative salary structures. Smaller differences between minimum and maximum pay bands, with more emphasis on promotion, may attract newer employees.

• Sales versus other departments. Bonuses for the sales department may be more easily quantified, but others in the company should not be excluded from bonuses. You should outline the frequency of bonus payments and the payout metrics.

• Commissions. Will these be based on volume of services performed, products made or even structured around sales volume?

• Equity in the company. Giving employees an ownership stake in the company allows them to profit as the company grows. If you offer employees an equity share, outline the types of stock and the vesting schedules.

• Updates to the compensation plan. How often will you review the plan? How will updates be communicated to employees?

A well-built compensation plan considers the type of work performed as well as applicable state laws and job market trends. A fair pay environment boosts recruitment, increases worker performance and motivation, and reduces turnover.

Effective Employee Performance Reviews

Effective Employee Performance Reviews

Performance reviews often feel like a one-way, top-down process in which you, the boss, are judge and jury. But if reviews are instead a two-way street, employees feel significantly less defensive. How do you create this two-way process? Let's look at some ideas.

First, you might ask the employee to write a self-evaluation prior to the review. How well did the employee meet their goals over the past year? How did they feel about their work? What did they do well? Where do they need more support? Ask them to open the meeting by sharing these thoughts. Letting them speak first helps diminish the sense of judgment by indicating that you are open to dialogue.

An additional step is to ask for employee peer reviews. Gathering additional observations, perspectives and comments about the employee's job performance dilutes the sense that you alone are judging the work.

For the evaluation itself, do not use arbitrary numerical grades, especially without substantiating what they mean. Instead, focus on the job performance. How well did the person meet the goals set last year (or in their job description)? If you are going to use numbers, make sure they assess results (like "increased accuracy by 29%").

"Meeting the goals set last year" (or in the job description) should be the focus of the review. Evaluate not the person but rather how well the person gets the job done. Shift to a results-oriented review rather than a personality-oriented one and set this focus both when you open the meeting and throughout the discussion. What actions (or attitudes) did the employee engage in that showed good work? What were the results those actions/attitudes achieved?

The discussion should be well-documented. Include any feedback you provide along with a record of the goals. Make sure each goal includes a time frame and a method of measuring whether the goal was attained. Both you and the employee can then determine whether they've succeeded in meeting or failed to meet the goal. Encourage the employee to keep a similar written record that they can use the following year in their self-evaluation.

If there's a gap between your view of the employee's work and their own, do not insist on your perspective. Instead, listen and talk through issues to try to determine what's underlying job performance problems. At the end of the discussion, you and the employee should be on the same page.

Do not end the review until you have a plan: What will the employee do in the next year? What will they improve on in the next months? What support do they need to achieve those goals? As above, these plans should be results oriented rather than personality driven. The plan should also outline any training or coaching the employee needs, along with what the employer will do (in terms of money, time or personnel) to support the employee.

And always provide employees with a copy of the completed evaluation form.

Additional details

It's important to separate a performance review from compensation discussions. Instead, conduct a salary review close to the time when raises are announced. If you conduct performance and salary reviews in the same discussion, the employee is likely to pay attention only to the money and miss the benefits of any coaching you offer.

The person who conducts the interview should be the supervisor or manager who has the most contact with the employee. They are in the best position to accurately assess day-to-day results. They should observe the process outlined above.

Provide notice of the performance review and let employees know that it is not a "judgment day." Create a thoughtful schedule and publicize it to the company.

If you design and follow a meaningful system of coaching conversations that employees welcome, find useful and see as valuable, you will motivate employees to thrive in their careers. You get better quality work by correcting problems, supporting quality work and laying the groundwork for advancement in the company.