Overtime Overhaul: Review Proposed Changes Now Before Final Rule Announced

Overtime rule expected to be costly

By Allen Smith  5/10/2016

overtimeAs HR professionals wait anxiously for the release of the U.S. Department of Labor’s (DOL’s) final changes to the overtime exemptions, it’s becoming clear that the new rule will cost many employers a lot of money. But the revised standard also will create an opportunity for HR to correct some past mistakes.

Employers will spend $592.7 million to comply with the new rule, the DOL estimated, saying that each of the 7.4 million affected establishments will need one hour to get up to speed on the changes. The department calculated that it will cost $254.5 million for businesses to become familiar with the regulation; $160.1 million to make necessary adjustments; and $178.1 million in managerial costs

“If you can do this in an hour, I might be calling you,” joked Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C., and a former acting administrator of the department’s Wage and Hour Division.

In addition, the net transfer from employers to workers will be $1.48 billion, the DOL estimated, with $1.39 billion of that resulting in more overtime compensation or increased salaries, Robinson said.

However, there is a silver lining for employers. The rule provides the opportunity to reclassify workers who have long been misclassified, since reclassification without a reason for it, such as a new rule, can raise eyebrows, said Andrew Burnside, an attorney with Ogletree Deakins in New Orleans, speaking at the firm’s Workplace Strategies Conference in Chicago last week.

That said, the rule is expected to raise numerous challenges when some workers get pay raises to qualify for the new exempt salary level while other workers are reclassified as hourly employees.

One college, Virginia Wesleyan in Norfolk, Va., has estimated that the overtime rule would result in total increased expenses of approximately $712,845, the Huffington Post reports. Its salary obligations would rise $657,000, not including the additional outlays to the college’s retirement plan—an additional $55,845 contributed annually to the retirement plan due to the higher salaries for some employees.

Many businesses haven’t budgeted for these expenses, Robinson noted, and he said that nonprofits and local governments will be hit particularly hard because they don’t have the resources to increase salaries above the salary level threshold, so workers will have to be reclassified as nonexempt.

Rule Highlights

The final overtime rule is expected to increase salary level tests for the executive, administrative and professional exemptions, Robinson observed. He noted that the rule also may periodically increase the salary level if it is indexed to 40 percent of full-time salaried earnings or pegged to the consumer price index, a measure of inflation.

The salary threshold for the white-collar exemptions is expected to be anywhere from $47,000 to $50,440—more than twice the current annual level of $23,660. Robinson said he expects it will be at the lower amount of $47,000 to show that the department heard businesses’ complaints about the higher figure. But the amount still would be close to $50,000, he said.

Robinson noted that there had been some speculation that the department might add more duties to the duties test for the white-collar exemptions. However, he noted that the department had received about 280,000 comments in response to the proposed rule as of the close of the comment period in September 2015 and didn’t think the department could expand the duties test in such a short period of time. “If I’m wrong, set up a dunking booth for me,” he joked.

The proposed rule mentioned the possibility of employers using a percentage of nondiscretionary bonuses to meet the increased minimum salary, but Robinson said he hasn’t heard anything further about that proposal.

While some employees will be bumped above the salary threshold for white-collar exemptions, at least for this year, others will be reclassified as nonexempt. Employers will have to “worry about off-the-clock work” by reclassified workers, who won’t be used to having to sign in and out, Robinson cautioned.

Opportunity for Employers

Robinson noted that factors to consider in reclassifying employees are:

  • Costs to absorb and manage overtime.
  • Morale issues. Employees who worked their way up won’t like the stigma of punching a clock and will feel as if they have been demoted. This could lead to increased turnover.
  • Inconsistency for large employers that may have to classify the same position differently depending on local economics.
  • Less clear lines between the department manager and the staff, as supervisors will have to work harder if duties once performed by reclassified workers are reassigned to managers.
  • Impacts on services and whether extra work that exempt employees did will not happen after the reclassification.
  • Temptation to use independent contractors.

Unaffected Provisions

Some pay provisions will not be affected, including:

  • Outside sales. There is no change to its provision that minimum pay is not required.
  • Computer professionals. There is no change to computer professionals being paid the hourly rate of $27.63 per hour or more.
  • Licensed professionals. There is no change for professional employees (such as lawyers and doctors), who are not required to be paid a salary or minimum pay. (They may work on a fee basis.)
  • Certain retail employees. There is no change for retail employees paid on a commission under the Section 7(i) exemption.

However, the proposed rule increased the highly compensated employee exemption from $100,000 to the 90th percentile of earnings for full-time salaried workers, or $122,148 annually.

Steps to Take Now

Robinson said there are a number of steps employers can take now. First, identify exempt positions where employees earn less than $50,000. Then, decide for which positions you will increase the salaries above the new salary level.

For those employees likely to be reclassified, he recommended determining:

  • What tasks those individuals perform on a weekly basis and how many hours they usually work.
  • What job duties can be redistributed or eliminated.
  • If an entire function can be outsourced.

Another consideration is whether benefits will change for workers moving from exempt to nonexempt.

After converting workers to hourly pay, employers will put restrictions on overtime work, he noted.

Options other than converting to hourly work include:

  • Salaried nonexempt employment.
  • Fluctuating workweek, though this is not administratively easy.
  • Belo contract, which is like the fluctuating workweek, only more complicated.

And employers’ communication plans and training should be at the ready.

The overtime rule “is not the end of the world,” Robinson concluded. “It’s changing the way we do business.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.