Government and Human Resources

Overtime rules raise questions

May 27, 2016
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How will the U.S. Department of Labor’s new ruling on overtime labor wages impact local small businesses? That depends.

While many on the federal level say the overtime ruling, which will extend overtime pay protections to more than 4 million workers within its first year of implementation, will be a good tool for bringing compensation fairness to workers, many on the small business level say it will be a tough financial hit.

The ruling goes into effect Dec. 1.

The DOL said the Final Rule focuses primarily on updating the salary and compensation levels needed for executive, administrative and professional workers to be exempt.

Specifically, the Final Rule:

**Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker).

**Sets the total annual compensation requirement for highly compensated employees subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004).

**Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure they continue to provide useful and effective tests for exemption.

**Amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

According to a statement from the White House, the ruling was necessary because, over the last 40 years, “overtime protections eroded as a result of inflation and lobbyists’ efforts to weaken them.

“The share of full-time workers qualifying for overtime based on their salaries has plummeted from 62 percent in 1975 to 7 percent today — even though the protections are more important than ever,” the statement read.

“Parents now have more demands on their time, with all parents working in more than six out of 10 households with children. And despite a recent acceleration in wage growth and businesses adding 14.6 million jobs over a record 74 straight months of job growth, most Americans have seen relatively stagnant wages for the past few decades.”

This rule has been a long time coming, said Michigan Sen. Gary Peters, a Democrat  and chair of the Senate Payments Innovation Caucus.

Peters was in Grand Rapids recently to meet with small businesses.

“I think it is time for the income to be changed. Basically, what is happening is that the increase represents the change to the cost of living since it changed last time, so it’s modernizing the regulations to today’s economic conditions,” Peters said.

“I want to make sure employers do have flexibility when it comes to people who may work more hours certain weeks versus others, to make sure they have the flexibility when they’re complying with the rule. That’s something I’m still digging into right now.”

The Grand Rapids Area Chamber of Commerce, however, is not as pleased with the ruling, said Andy Johnston, GRACC vice president of government and corporate affairs. Johnston called the ruling “a dramatic form of federal government interference in the workplace,” and said it should be overhauled to avoid the negative impact it will have on the economy and the workers it was intended to support.

“On behalf of our member employers, the Chamber opposed the Department of Labor’s overtime rule. We remain concerned about the effect this will have on a wide range of employers and their employees when it takes effect on Dec. 1, 2016. … While it may have been necessary to review the salary level last increased in 2004, more than doubling the salary threshold is likely to have a negative impact on employers and employees,” he said.

“Employees will likely also have to adjust with losing flexibility of their scheduling. For instance, if employees take time off for doctor’s appointments, family needs or school meetings, they may lose pay they would have received if they remained salaried.”

The impact of the rule will likely be pronounced for nonprofit employers, academic institutions and local governments, Johnston said. Many may have difficultly increasing revenues to cover higher labor costs. Employees of nonprofits routinely work long hours, he said, and this rule may impact their ability to serve their clients.

For other businesses in which profit margins are tight such as in tourism and restaurants, companies may not be able to absorb the added costs and may need to consider restructuring through lower hourly rates, reducing hours or replacing mid-management positions with lower wage employees, he said.

Johnston advises employers to assess all positions currently classified as exempt to determine if they will be properly classified under the new standards. If not, it will be important to determine how much overtime employees in those positions actually work. The employer will then need to decide to “either increase their employees’ salaries to keep them exempt, or reclassify them as hourly employees and possibly pay them overtime,” he said.

“Reclassifying employees means they will lose the ability to set their own hours, work from home and answer email after-hours on smartphones. Employers will have to adjust for this, as well as working with employees who may see the reclassification as a demotion,” he said. “Employers will also need to ensure they have systems in place to reliably and accurately track employee hours.”

Some local businesses have started looking for people who can help them figure out how to navigate the ruling. That’s where Beth Kelly, founder and managing partner of Grand Rapids-based HR Collaborative, comes in. Kelly agreed with Johnston that those most impacted by the ruling will be nonprofits, retail operations and restaurants, “where many people are just starting their careers.”

“Sometimes new regulations can be confusing, which makes it difficult to consider all the implications and then implement all the necessary changes,” she said. “Small businesses often don’t have a designated HR department to help them figure it all out. We are helping many West Michigan employers navigate the new regulations. So, we will be busy.”

Kelly said there are a number of ways to navigate the ruling. For example, if a business or nonprofit has an employee on the payroll who’s currently exempt from overtime but still makes less than $47,476, there are basically four options: Keep him or her as an exempt employee and increase the pay to $47,476; change the employee’s classification to hourly and pay overtime when he or she works more than 40 hours in a week; keep the employee on salary but still pay him or her overtime when he or she works more than 40 hours; or change the classification to hourly and reduce the employee’s pay so any overtime doesn’t mean more payroll cost.

“Keep in mind, this is more than just a numbers game,” Kelly said. “There’s much more to consider: company culture, policies, communication, changing mindset and employee morale, to name a few.” 

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