Impact of FLSA Overtime Ruling on Private Equity Strategies

Understanding the Ruling and Its Context

On November 15, 2024, an important event happened in labor laws. A federal judge canceled the Biden administration's proposed changes to the Fair Labor Standards Act (FLSA) overtime rule.

Initially slated to take effect in 2025, these changes would have elevated the salary threshold for overtime exemption. In the wake of this ruling, the threshold has reverted to $35,568 annually, which aligns with the level set in 2019. Additionally, the court's decision effectively blocks any future automatic adjustments to this threshold.

The ruling reflected concerns that the earlier proposed changes focused too much on salary levels. They ignored the importance of job duties in deciding employee classification. This ruling has wide-ranging implications for private equity firms and their portfolio companies, necessitating careful consideration and strategic planning moving forward.

Key Impacts for Private Equity and Portfolio Companies

1. Cost Implications

   • Short-term Relief: Many companies feel relieved about labor costs due to this ruling. Organizations that were preparing for higher costs from the planned salary increases can now keep their current pay structures. They do not need to make any changes. This translates to immediate financial savings, allowing businesses to allocate resources to other pressing operational needs.

   • Long-term Risks: The short-term outlook looks good, but there are hidden challenges. These challenges could come from keeping old salary thresholds. In industries like manufacturing, hospitality, and retail, where pay is often low, companies may struggle to keep employees. The labor market is competitive. Employees are looking for higher wages and better benefits. If employers cannot provide good pay, they may lose workers.

2. Compliance Risks

   • Diligence in Classification: Compliance with FLSA regulations now requires heightened HR due diligence, particularly regarding the classification of employees as exempt or non-exempt. Portfolio companies must rigorously adhere to the FLSA's duties test for exempt employees. This requirement adds complexity to audits and reclassification processes, especially during periods of due diligence in mergers and acquisitions.

   • Litigation vulnerabilities arise as the risk of misclassification lawsuits persists and may increase following this regulatory rollback. Portfolio companies must ensure that their classification practices align with legal standards to mitigate potential liabilities stemming from litigation or regulatory scrutiny.

3. Impact on Deal Value

   • Private equity firms must understand how analysts classify labor costs when they evaluate potential acquisition targets. Companies that have used a low salary limit to classify employees as exempt may show inflated earnings. This includes figures for earnings before interest, taxes, depreciation, and amortization (EBITDA).

   • It is important for private equity investors to carefully analyze labor costs during their evaluations. This helps them avoid overpaying for acquisitions. Misleading financial reports or unexpected liabilities can arise after the acquisition.

Recommended Actions for Private Equity Leaders

1. Evaluate Labor Strategies Across Portfolio Companies

   • Private equity leaders should take this opportunity to assess labor strategies across their portfolio companies. It is important to follow the new $35,568 salary rule. We also need to make sure that employee roles match the duties test in the FLSA. This evaluation can also serve as a platform to benchmark compensation practices and address potential turnover risks proactively.

2. Engage Legal and HR Experts

   • Collaborating with human capital consultants, like 29Bison, can provide essential insights and frameworks for proper employee classification and wage practices. Engaging with experts allows private equity firms to navigate the complexities of labor regulations effectively. This action helps them keep track of any appeals or policy changes. These changes could happen again in the future.

3. Adapt Due Diligence Playbooks

   • During mergers and acquisitions, private equity leaders need to review workforce classification. They should also check pay compliance. This is an important part of HR due diligence. By changing their due diligence playbooks, firms can spot potential problems. These issues could impact deal valuations or lead to unexpected liabilities.

The vacated FLSA overtime rule serves as a reminder of the ever-evolving landscape of labor regulations. For private equity investors, this ruling requires a proactive and adaptive approach to workforce management. By understanding the effects of this regulatory change, private equity firms can handle labor compliance better. They can reduce risks and support steady growth in their portfolios in a more competitive market.

Why Choose 29Bison?

Choosing the right partner for HR due diligence and integration is critical to the success of any transaction, and 29Bison offers unmatched expertise and support in navigating these complexities. With a people-first approach, we go beyond traditional due diligence to address not only workforce-related risks but also opportunities that drive long-term value creation. Our comprehensive HR diligence services uncover hidden risks, optimize workforce strategies, and identify synergies that align with your strategic objectives. Post-transaction, we provide tailored integration solutions designed to foster a seamless transition, retain key talent, and build a cohesive organizational culture that supports sustainable growth.

At 29Bison, we’re more than consultants—we’re partners invested in helping you achieve your vision by maximizing the potential of your most valuable asset: your people. Let us help you turn challenges into opportunities and create a solid foundation for success. Reach out today to learn how we can support your HR diligence and integration needs.