Overtime Rule Changes Not Final, but Employers Rushing to Comply

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By Ben Penn

April 13 — Some businesses are forging ahead with compliance strategies even before they know exactly how or when rules governing overtime pay will change.

With the Labor Department yet to finalize a regulation that expands overtime eligibility, one theme is becoming clear: Companies are seeking legal advice on how to avoid paying time-and-a-half to the countless lower-paid managers expected to become eligible for overtime.

When the DOL sent a draft final rule to the White House's Office of Management and Budget for review March 14 , it “really brought the issue to the fore for many businesses,” Paul DeCamp, a shareholder at Jackson Lewis P.C. in Washington, told Bloomberg BNA.

Employers that have begun tackling these compensation and staffing issues are eyeing a final publication of the rule within weeks and an effective date as soon as this summer.

Submission of the final draft has meant an uptick in businesses assessing how many employees fall below the DOL's proposed new threshold for overtime exemption and tracking their hours and job duties.

Most observers consider it unlikely that the proposal's $50,440 per year salary threshold will change substantially in the final rule. Still, several mysteries remain about the final language, making it too soon for even the proactive businesses to finalize their plans.

Under current Fair Labor Standards Act regulations, salaried workers who perform managerial duties and earn more than $23,660 per year are exempt from overtime wages. The DOL's Wage and Hour Division proposed more than doubling the salary threshold to $50,440, which equates to the 40th percentile of annual full-time earnings. The $50,440 cap to receive overtime would then be updated each year with inflation.

There's an “acceptance that at least some large segment of the workforce making beneath $40,000-$45,000 are going to have to be reclassified as overtime eligible,” Brett Bartlett, a partner in the wage and hour litigation department at Seyfarth Shaw LLP in Atlanta, told Bloomberg BNA.

“For most clients that I’m talking with, employees who get converted to nonexempt will end up being paid primarily on an hourly basis, potentially with some measure of incentive comp or other sweeteners to encourage performance,” said DeCamp, who served as the DOL Wage and Hour Division administrator from 2006-2007.

Employers Not Talking

In a 2014 presidential memorandum and 2015 proposed rule (RIN 1235-AA11) , the Obama administration stated its intent to provide long-needed raises to salaried workers, many of whom are concentrated in the service and retail industries.

Bloomberg BNA requested details from about a dozen national corporations on how they might alter employee compensation, hours and duties in response to the regulation. All of the companies either declined to comment or didn't respond.

It's common for companies to withhold employment strategies from the public, especially on a topic as sensitive as offsetting the cost of raising wages. That leaves wage and hour defense attorneys, who regularly engage with clients on such matters, to offer an inside view of how the DOL regulation could bring a significant shift in staffing and payroll structure.

Hourly Versus Salaried

Employers that have audited employee information in anticipation of the final rule are then faced with a slew of difficult compliance decisions, DeCamp said.

Shifting workers to hourly status has been the more popular choice thus far because it allows companies to more easily track weekly hours, several attorneys said. Other businesses have told the attorneys they prefer to offer a slight bump to those falling just below the threshold to keep them exempt.

The deciding factor is how many of its employees fall below the proposed threshold and by how much. The decision has “a lot to do with how far away from $50,440 the bulk of the employees in a job classification are,” Tammy McCutchen, a principal at Littler Mendelson P.C. in Washington, told Bloomberg BNA.

“If you’re talking about people who are making $35,000-$40,000 in a year right now, I think the decision is leaning towards we are going to reclassify because it's just too much of a salary increase,” added McCutchen, who as WHD administrator in 2004 oversaw the previous regulatory revision to overtime exemptions.

The wage and hour practitioners said a frequent question they're hearing from clients is whether they can move some employees within a single job classification to nonexempt while keeping others—who earn closer to the threshold or above it—as exempt. The idea of adopting “a one-size-fits-all” solution has many companies “struggling,” DeCamp said.

Fluctuating Workweek Calculation

Another variable involves whether employees typically work a fixed number of hours in a week or are more likely to have fluctuating hours.

For the newly nonexempt who work a consistent number of overtime hours per week, attorneys are suggesting that employers can move them to an hourly rate calculated to offset additional overtime costs. They would use a simple formula to ensure that the hourly rate, including overtime hours, leads to the same annual salary workers were previously paid.

The companies dealing with less predictable employee hours have been receptive to using the fluctuating workweek method to comply with the regulation, Seyfarth Shaw's Bartlett said.

Employers using this method for calculating overtime pay generally divide a fixed weekly salary by the actual number of hours worked in the week to determine the week's base hourly rate. Overtime is paid by adding an additional half-time for each hour worked in excess of 40. The FLSA allows this method for certain employees who receive a fixed salary but aren't exempt from overtime provisions.

Employers that find the fluctuating workweek calculation attractive are motivated by a desire to maintain employee morale by not stripping workers of their salaried status, Bartlett said.

Can Bonuses Be Applied?

One big question is whether the DOL will allow businesses to apply bonuses or other incentive pay toward an annual salary when calculating exemption from time-and-a-half pay, several attorneys said.

The WHD stated in the proposed regulation that the DOL “is now considering whether” the final rule will “permit nondiscretionary bonuses and incentive payments to count toward a portion of the standard salary level test for” overtime exemption. The agency suggested that, if it includes this provision in the final rule, bonus payments could satisfy no more than 10 percent of the salary level.

Further, if such a bonus allowance is included in the final regulation, the DOL said it “envisions” that employees would need to receive bonuses “monthly or more frequently,” rather than on an annual basis.

DeCamp said the lack of certainty on bonus payments is “part of what is holding employers back” from “actually implementing” their compliance approach.

Perhaps the biggest wild card of all is whether the final regulation will address the FLSA's primary-duties test for determining whether an employee is a bona fide administrative or executive employee and therefore not eligible for overtime wages.

While the proposal didn't change the duties test, it did pose questions for comment, including whether the DOL should adopt a quantitative test that an employee must spend at least 50 percent of his or her working time performing exempt job duties to be deemed ineligible for overtime pay.

Although some companies have been auditing job duties as part of their groundwork, “employers by and large have not really thought about changes in the duties,” Alfred Robinson, an acting WHD administrator under President George W. Bush, told Bloomberg BNA. Robinson is now a shareholder with Ogletree, Deakins, Nash, Smoak & Stewart P.C. in Washington.

Timing of Release Top Concern

Putting aside some of the more detailed, company-specific questions attorneys are fielding, they all share a concern about not knowing when the rule will take effect.

McCutchen and others have forecast a mid-May publication with an effective date of 60 days later. The OMB has scheduled meetings with stakeholders on the rule through the end of April, indicating a release wouldn't come before May .

But for now, businesses at more advanced stages of planning will be ready to implement changes the moment the OMB completes its review.

“I think we’ll see the big changes made once the final rule is published and we know when it goes into effect,” Robinson said. “Then I think we will see fine tuning of operations, compensation and staffing.”

To contact the reporter on this story: Ben Penn in Washington at bpenn@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com