New overtime regulations to change how businesses compensate employees

Work the clock

Overhauled overtime regulations from the U.S. Department of Labor, released in their final form May 17, will dramatically change the way some businesses and their employees account for their time on the job.
Overhauled overtime regulations from the U.S. Department of Labor, released in their final form May 17, will dramatically change the way some businesses and their employees account for their time on the job.

Long week at work? It's all right - your team of employees is salaried. They'll make up the time when things slow down.

In a few months, that line of thought may change.

Overhauled overtime regulations from the U.S. Department of Labor, released in their final form May 17, will dramatically change the way some businesses and their employees account for their time on the job.

The regulations, which become effective Dec. 1, amend the existing Fair Labor Standards Act (FLSA) - most notably doubling the minimum salary required for an employee to be considered overtime-exempt, from $23,660 to $47,476 a year.

That means any employee who currently qualifies as exempt from being paid overtime, based on his salary and job duties, may start earning time-and-a-half for work past 40 hours a week if he earns less than $47,476 a year.

President Barack Obama signed a presidential memorandum in March 2014 directing the DOL to update the existing regulations, which were last touched in 2004. That previous round of updates raised the minimum salary to $455 per week ($23,660 per year), which is now lower than the poverty threshold for a family of four.

The new salary threshold represents the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region, currently the South at $913 per week ($47,476 per year). (The 40th percentile of weekly earnings in the Midwest is $994 per week, or $51,688 per year.)

The DOL estimates 22.5 million of the approximately 159.9 million U.S. wage and salary workers expected in fiscal year 2017 will be affected by the change.

What does it mean for businesses?

That's a lot of math. And as with many federal regulations, some business owners and managers may be inclined to believe the trickle-down for them will come long after Dec. 1, if at all.

Wayne Berry, a human resources veteran and president of Jefferson City consulting firm Aquarius International Corp., has a message for those so inclined - no company is too small.

"If you're involved in interstate commerce, you're not exempt. So the question would be, 'OK, do you have a telephone?'" Berry said.

"The other thing that people will tend to say is, 'Well, this is so massive and it's national, and we're sitting out here in Jefferson City with our very small company. Nobody's ever going to investigate us," he continued. "All it takes is one disgruntled employee to make a phone call, and, by golly, they're there examining you."

With that said, the new overtime regulations likely will affect some sectors more than others.

"We think it's going to impact about 44 percent of all small businesses," said Brad Jones, Missouri director for the National Federation of Independent Business. "We're not happy with it. It's such a jump, going from $23,760 to almost double that, and then expecting everybody to be able to understand how it's going to affect their business by Dec. 1."

From the NFIB's perspective, the attempt to increase the number of individuals who can earn overtime pay could hurt more employees than it helps.

"The thing that we really worry about the most is that it's going to really inhibit those individuals in your organization that have worked hard, that have tried to get up to where they are a salaried employee, and the decision might have to be made that they go back to hourly. That's not good for morale," Jones said.

Nonprofits aren't necessarily immune, either.

"An individual is protected by the FLSA regardless of whether the individual works for a covered enterprise - if he or she engages in interstate commerce through activities such as making out-of-state phone calls, sending mail or handling credit card transactions," Berry said.

Employees of educational institutions, too, fall under the FLSA, but teachers are exempt as long as their "primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge," according to the FLSA.

The first thing employers should do is determine whether or not they need to do anything. The test for that is: Do we have any employees, any title, that are making less than $47,000? If they are, those people have to go on hourly; they are no longer automatically exempt."

Plan of action

"The first thing employers should do is determine whether or not they need to do anything," Berry said. "The test for that is: Do we have any employees, any title, that are making less than $47,000? If they are, those people have to go on hourly; they are no longer automatically exempt."

Those situations are where big decisions have to be made.

"If you have somebody that's been making a $25,000 salary and their job duties fit an exemption, you have to decide: Am I going to pay this person $47,000 to do that job with the same hours?" said Tom Haynes, an attorney at Carson & Coil in Jefferson City, which assists clients on employment and labor law among other practice areas.

Essentially, that manager must decide whether to raise the employee's salary significantly or transition the employee from salaried to hourly pay.

"That's an easy decision if they're making $45,000; you might just want to go up the extra $2,000," Haynes said. "But if they're making around $36,000 - now that's a $10,000-$15,000 jump. That's a lot bigger change, and that's a lot bigger decision you have to make."

If the decision is to make the employee hourly, that means new considerations, like checking in and out on a time clock, that likely weren't part of a previously salaried employee's daily routine.

The benefit for employees in that situation is that they become eligible to earn overtime pay for working hours that surpass 40 a week.

But if a company's budget doesn't allow for much overtime, managers might begin cracking down on those hours at the same time some employees are becoming hourly.

"There is a potential danger of companies going to part-time employees, and then there's never a question of overtime. They can work 29 hours a week and be classified as part time," Berry said. "If you can get two people to work 29 hours, that's 58 hours between two people with no overtime."

That might be an extreme reaction, though, he added.

"I suspect most employers will not do that," Berry said. "You have all the problems with two people that you would only have with one," like vacation time and sick leave.

The key for managers making those tough decisions is to communicate the changes and the reasons for them clearly - and quickly - to affected employees.

"It should be communicated as early as possible to employees," Berry said. "They should be told this is not a demotion whatsoever, benefits are the same, everything is the same, except because regulations tell us we have to do this."

The person doing the talking could depend on the size of the company and its HR department.

"The small employers should figure out what they want to do and preferably have somebody outside the company come in and explain what's going to happen. It could be a CPA, their accounting firm or accountant, which is preferable," Berry said. "I really believe a third party who is trying to do that kind of stuff will put the employees at ease better than what the owner will do. The owner's going to get on the defensive too easily."

You don't just raise wages in a vacuum."

Duties test

One piece of the puzzle that was already in place may surprise some business owners and employees: overtime exemptions already depended on both salary and job duties.

"A lot of employers are kind of under the impression that merely labelling someone as salaried and paying them the appropriate salary - which is not very high right now - that's enough. There's something magical about being called 'salaried,' and they're no longer eligible for overtime pay. They forget about those duties tests," Haynes said. "Even if you are paid that salary level, that's not enough. They actually have to have job duties that qualify for an exception."

The existing duties test, which the new regulations will not change, accounts for executive, administrative and professional exemptions.

"Probably the most common one people are familiar with is the executive exemption, which covers managers," Haynes said. "Basically, they have to actually be directing the work of others, at least two full-time employees. They have to have things like authority to hire and fire; their recommendations, their decisions on hiring, firing, promotions, all those sorts of things, have to have some sort of weight with the employer."

Assistant managers in some cases have offered a prime example of misunderstanding the executive exemption. "They never actually were hiring anybody, firing anybody; they never had any discretion to do anything. So even though they had the title, they had the salary, they didn't qualify for the exemption," Haynes said.

The similar administrative exemption requires an employee's primary duty to be "office or non-manual work directly related to the management or general business operations." Again, significant discretion regarding "matters of significance" is key.

"If you don't actually get to make a decision - you're just executing the decisions of other people - you don't qualify," Haynes said.

He offered an example from his own industry in paralegals. "Some paralegals are very high-level, highly qualified professionals, but at the end of the day they don't really have much discretion because they have to have their work signed off on by an attorney."

Perhaps the most clear-cut duties exemption is "professional," which involves work performed more than it does authority.

"The employees have to be in a job with advanced knowledge of an intellectual character very specialized, non-manual-type work," Haynes said. "If there's a professional degree covering it, it probably falls under this exemption."

Again, the duties test for overtime exemption isn't changing; but changing salary regulations likely will call more attention to it.

The cross-industry subsection of employees who could be affected most by that renewed attention is middle managers.

"The Department is concerned that under the current regulations employees in lower-level management positions may be classified as exempt and thus ineligible for overtime pay even though they are spending a significant amount of their work time performing nonexempt work," the DOL regulations state.

Even if middle managers' duties do qualify for an executive or administrative exemption, they're often the employees working their way up the salary chain where they may be earning less than the new $47,476 minimum.

"If you've got a person you're relying on that you're paying $30,000, you've got to do something. Either prices are going to go up for your service, or you're going to have to make that up through something," Haynes said. "Maybe cut benefits. Maybe you cut other personnel - and, then again, you've lost an entry-level position in the labor market. You don't just raise wages in a vacuum."

A full audit of existing positions is the best way to ensure the employees you list as exempt meet both the salary and the duties tests.

"Make sure that you're on good ground with the exemptions, that you know what the job is, you know exactly what they are doing - not just what their job description is but what they're actually doing," Haynes said.

Read more from the July edition of #jcmo Inside Business here.