Employers Grappling With New Overtime Rule

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By Gayle Cinquegrani

June 2 — Many employers are taking their time to carefully digest the Labor Department's new overtime rule before rushing in and changing their employees' pay and workload.

Employers, lawyers and human resources professionals contacted by Bloomberg BNA in the days following the May 18 publication of the rule indicated they are analyzing it and systematically weighing their options for raising pay and reclassifying their employees.

Giant Food told Bloomberg BNA in a May 31 e-mail it is “currently reviewing the effect of the new federal overtime regulation.” Macy's said in a May 31 e-mail it is “studying the situation to determine what changes will be required.” And on May 26, Starbucks told Bloomberg BNA in an e-mail it has been “evaluating the new regulation.”

The DOL rule will make as many as 4.2 million more workers eligible for time and one-half their normal pay when they work more than 40 hours in a workweek. Currently, workers earning more than $23,660 per year don't qualify for the overtime premium if they perform specified executive or professional duties.

Under the new rule, starting Dec. 1, 2016, workers being paid less than $47,476 per year will be eligible for overtime pay regardless of their duties. This salary threshold will be updated every three years (34 HRR 539, 5/23/16).

Rule Could Change Workplace Culture

Complying with the rule could change the culture in many workplaces, two attorneys affiliated with the Wage and Hour Defense Institute told Bloomberg BNA May 23. WHDI members are lawyers who represent employers in wage and hour matters.

“You’re going to have to retrain a lot of people in how they act,” according to Jonathan Keselenko, a partner at Foley Hoag in Boston who chairs the WHDI. Employees reclassified from exempt to non-exempt will have to get used to punching a time clock and requesting permission to work overtime, and their managers will have to learn not to text and e-mail them “at all hours,” Keselenko said.

“There’s going to be a lot more pressure on employees to manage their time” to get all their work done without working overtime, according to Robert Boonin, a partner at Dykema in Detroit and a former WHDI chair. “Employers are going to have to rethink who has remote access [to their workplace], and why,” he added.

The decision whether to allow non-exempt employees to have remote access is “going to be a very specific employer-by-employer decision,” Keselenko said. “I think some employers may cut that off entirely.”

To implement the new rule, employers should look “at the roster of employees … especially the ones classified as exempt,” to identify those whose salaries are near the threshold of $47,476, Keselenko said. “The people below that will need to be reclassified” as non-exempt, he said.

Keselenko said he fears employers may think a blanket overtime exemption exists for employees making more than $47,476. The duties test still exists, he cautioned, so employees earning more than that amount still can qualify for overtime if their duties aren't sufficiently professional or managerial.

Review Classifications of All Employees

Keselenko suggested that employers also consider reclassifying employees whose salaries are a few thousand dollars above the new threshold because it is likely to rise to about $51,000 in 2020.

Employers also could scrutinize the duties of the newly non-exempt to determine if some could be reassigned to other employees who still won’t be eligible for overtime, Boonin said.

Another option for offsetting salary increases would be to reduce employees’ fringe benefits and bonuses, Boonin said.

Keselenko warned that bonuses must be paid quarterly so they can count as part of an employee’s salary under the DOL rule. Some employers might find it easier “shaving the bonus and just increasing the base salary,” he said.

Employers will have to decide whether to maintain their salary hierarchy as they respond to the new overtime rule, Nancy Hammer, senior government affairs policy counsel for the Society for Human Resource Management, told Bloomberg BNA May 25.

Sometimes employees in the same job classification have different salaries, often based on their length of service. Employees just below the new overtime threshold who get a pay boost could catch up with employees who were already just above the threshold, which could cause resentment among the more senior employees, Hammer said.

She said employers could solve the problem by creating a step within the job classification. The more senior employees could be assigned to a higher step that pays slightly more.

HR professionals should focus on “making sure that employees who are now non-exempt who used to be exempt understand how [the rule] applies to them,” she said. For example, “a lot of exempt employees don’t record their hours at all,” so newly non-exempt employees may have to be taught “to do things differently,” Hammer said.

Big Impact on Nonprofits

Nonprofit organizations are “going to be particularly affected because their wages are lower,” and their employees are more likely to fall below the new exemption threshold, Hammer said. Nonprofits may have more trouble raising pay, too, because they can't pass on their added costs to consumers like for-profit businesses can, she said.

Regina Coeli, a nonprofit corporation in Robert, La., that operates Head Start programs, illustrates this situation. The rule “puts us in a precarious situation,” Philip Morris, Regina Coeli's controller, told Bloomberg BNA May 25.

Regina Coeli has 450 employees spread among 14 centers. Most are non-exempt teachers and teaching assistants, but the 14 center directors and about 50 disability, health, and education specialists currently are classified as exempt.

About five of the center directors are at or above the new salary threshold, and the others will get raises of about $1,000 to $4,000 to elevate them to the new salary threshold for exempt status, Morris said. Some of the specialists will get raises to bring their salaries up to the new threshold, and others will be reclassified.

The process for deciding which tack to take is time-consuming. First, Morris, the HR department and the program directors will make a recommendation for each position. Next, the policy council—which includes parents—will weigh in, and then the board of directors will make the final decisions. “It’s a good thing that [the Labor Department is] giving us six months,” Morris said.

No Money for Raises

Finding the money for raises will be problematic. “Eighty percent of our operating budget comes from government funding,” Morris said, and the “grant is a fixed amount.” He said he’ll have to decide whether to serve fewer children or to move funds from other parts of the program.

Regina Coeli is careful about its overtime costs. “We don’t have any money in the budget for overtime,” so “we have almost had to ban teachers from talking to parents after hours,” Morris said. When the centers schedule nighttime family events, “we make sure [teachers] flexed out their time earlier in the week so they can extend” their hours to attend, he said.

Terry Shea is another manager who isn't sure how to maintain her business's current practices under the new rule. She co-owns an online store and two gift boutiques in Alabama called Wrapsody, employing about 30 part-time associates and four salaried store managers and assistant managers.

Shea told Bloomberg BNA May 27 that she and her co-owner take the managers and assistant managers to a convention in Atlanta twice each year to buy inventory. The managers help select the products because they're familiar with customers' tastes, she said. In addition, “it’s great for networking” and “it’s something they look forward to.”

Wrapsody pays for the hotel, travel, and food. “With the new rule, it’s hard to know—do you pay them for the whole time or for an eight-hour workday, or what?” Shea said.

The Wrapsody managers, assistant managers and owners also go on an annual retreat, where they bond and brainstorm ideas for the store. Shea said she doesn't understand how the new rule will affect her pay obligations toward the managers and assistant managers for their time at the retreat.

Converting Assistant Managers to Hourly Status

Shea probably will convert the two assistant managers to hourly status but won’t decide whether to also convert the two store managers until after she listens to a webinar from the Alabama Retail Association.

She is certain about one thing, though. “We will not be raising their salary,” Shea said. “Our store managers and assistant managers are competitively compensated for our area of the country based on the type of position they hold.” Shea said her payroll expenses, which consume 23 percent of her budget, already exceed the norm.

Even a large employer like global technology firm Pitney Bowes is still formulating its compliance approach. “We haven't made any firm decisions yet,” Johnna Torsone, chief human resources officer at Pitney Bowes, told Bloomberg BNA May 27. “This is complicated. We want to do the right thing for the employees, and we want to make sure the company stays competitive as a business.”

Only “a very small percentage of our population”—about 250 of the company's 9,000 employees in the U.S.—will be directly affected by the new overtime rule, Torsone said. Most of them are supervisors at large mail-presorting facilities.

Torsone said she will formulate the company's response to the rule in consultation with its legal and business departments.

She said she doubts many companies will change their fringe benefits to offset the cost of raising salaries above the new overtime threshold. “Your benefit structures are impacting a lot of people,” more than those whose exemption status needs to be changed, Torsone said. “The focus for most companies I would think would be on the pay structure” and on the amount of overtime rather than on fringe benefits, she said.

To contact the reporter on this story: Gayle Cinquegrani in Washington at gcinquegrani@bna.com

To contact the editor responsible for this story: Tony Harris at tharris@bna.com