How to Prepare for the New Federal Overtime Rule

No HR professional is exempt from the planning.

By Stephen Miller, CEBS, Allen Smith, J.D., and Dori Meinert Jul 1, 2016
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[Editor's note: A federal district court has granted a preliminary injunction blocking the overtime rule from taking effect Dec. 1.]

​​​​​​​​​​​​​​​​​​​​The 24 general managers who keep Toppers Pizza’s corporate restaurants up and running work about 50 hours a week, sometimes more if an hourly worker calls in sick or quits suddenly. The managers receive a guaranteed salary plus bonuses and are exempt from overtime pay.

However, by December, their positions will most likely be reclassified as hourly nonexempt, or perhaps salaried nonexempt, to comply with the new federal overtime regulation.

The company’s HR manager worries how that change will affect morale. “Some of those general managers have been with the company nine years,” and switching them to hourly status could be perceived as “a slap in the face,” says Robin Gittrich, HR manager for the Whitewater, Wis.-based company. ​

On Dec. 1, the federal annual salary threshold for employees exempt from overtime pay will double, increasing to $47,476 from $23,660. Employees who make less than the threshold must be paid time-and-a-half for any hours worked beyond the 40-hour workweek.

Toppers Pizza’s six area supervisors are already paid close to that higher threshold, and their salary will likely be bumped up so that they remain exempt from overtime. However, the company can’t afford to increase general managers’ salaries to that amount, Gittrich says.

She’s still trying to estimate what the company’s future overtime costs for managers will be. In the restaurant industry, managers “don’t know when someone is not going to show up for a shift, or when three people ask to go on vacation at once,” she says.

Toppers Pizza is among the hundreds of thousands of organizations nationwide scrambling to figure out how to comply with the new overtime regulation. More than 4.2 million additional white-collar workers in the U.S. will become eligible for overtime under the new criteria, according to the U.S. Labor Department. The annual salary threshold will be updated every three years, reaching more than $51,000 in January 2020 by Labor Department estimates.

The Impact

Opponents of the new rule argue that the requirements are too costly for employers and will hurt employees by taking away their flexibility and moving them from salaried positions to nonexempt status, which many perceive to be less prestigious.

“Employers can expect many employees to feel hurt and underappreciated,” says Alice Kilborn, SHRM-CP, a consultant on workplace litigation prevention in Albuquerque, N.M. “Many workers place a premium on the prestige of being considered an exempt or salaried employee—no matter how much we emphasize that it’s just a categorization of pay and not a reflection of importance or level of contribution. [It] may seem like they’re being demoted.”

The new regulation will cost private employers $1.8 billion in the first year, the Labor Department estimates. But opponents argue that the cost to extend overtime protection under the federal Fair Labor Standards Act will be significantly more. Among the organizations expected to be hardest hit are retail shops, restaurants, call centers, nonprofits and small businesses.

The new overtime rule is expected to cost private employers about $1.8 billion 
in the first year.
Source: U.S. Labor Department.

Among the organizations expected to be hardest hit are retail shops, restaurants, call centers, nonprofits and small businesses.

"These rules are a career-killer,” said David French, senior vice president of the National Retail Federation, in a written statement. “Most of the people impacted by this change will not see any additional pay. Instead, this sudden and extraordinary increase will mean more red tape and fewer advancement opportunities for salaried professionals.”

Other business groups opposed to the new regulations include the Society for Human Resource Management (SHRM), the National Council of Chain Restaurants and the National Federation of Independent Business. While critics have threatened to try to block or modify the rule in Congress or the courts, it was unclear at press time whether those efforts will succeed.  ​

Of course, some HR professionals say the changes are long overdue. 

“I can’t imagine making someone work more than 40 hours a week for less than $24,000 a year,” says Anissa Lindgren, HR manager for Sellen Construction in Seattle.

The current overtime exemption threshold of $23,660 is lower than the federal poverty level for a family of four. And 67 percent of Americans favor expanding the number of workers eligible for overtime pay, according to a Gallup survey of more than 2,000 U.S. residents conducted in late May.

Lindgren“Employers are required to absorb new costs all the  time,” Lindgren says. “Quality employers value their employees. They value their time and contributions to the company, and they welcome ways to increase employee engagement by providing fair compensation.”

Most of her company’s 1,000 workers are already paid above the new threshold, so she doesn’t expect to make many changes. But she says it’s still a good opportunity to audit the company’s job classifications to see if there are any jobs that need to be reclassified.

In many organizations, HR professionals may find that they themselves are newly eligible for overtime. The median annual salary for HR assistants is $38,100, and three-fourths fall under $46,400, according to a May 2015 report by the Labor Department’s Bureau of Labor Statistics.

Adjusting Pay

After determining how their workforces are affected by the new rule, employers have three basic options for adjusting their compensation practices, according to the Labor Department. The options are:

  • Increase employees’ salaries to above $47,476 to keep them exempt from overtime.

  • Reclassify positions that pay between $23,660 and $47,476 from exempt to nonexempt, and pay employees in those positions overtime when they work more than 40 hours a week.

  • Restructure the workforce or particular jobs. This might include removing some duties from a group of employees so that they can complete their work in 40 hours a week and transferring those duties to another group who have had their salaries increased to remain exempt.

For the first time, the new regulations allow employers to use nondiscretionary bonuses and incentive pay to satisfy up to 10 percent of the salary threshold, provided the incentives are made on a quarterly or more frequent basis.

Nondiscretionary bonuses or incentives are just that—not discretionary. In other words, if an employee meets his or her performance or productivity goals, “there’s no question about whether it’s going to be paid out or not,” says Meg Ferrero, assistant general counsel at ADP, a payroll and HR services firm based in Roseland, N.J.

But optional perks such as a golf club membership don’t qualify as a bonus, says Michael Eastman of NT Lakis LLP in Washington, D.C., who argued against the overtime changes on behalf of SHRM.​​​

Under the new rule, if an employee doesn’t earn enough in nondiscretionary bonuses and incentive payments in a given quarter to retain exempt status, he or she would be entitled to time-and-a-half for any overtime hours worked throughout the quarter. Employers can opt to make one “catch-up” payment to the worker at the end of the quarter to compensate for the shortfall.

​​Roberts“If employees are productive or saving money and we’re able to give them a quarterly bonus that will help toward the threshold, then we might be more eager to do that vs. increasing base pay” to maintain their exempt status, says Sally Roberts, SHRM-SCP, director of HR at Morris Communications Co., a newspaper and magazine company based in Augusta, Ga.

The company has about 1,800 employees nationwide, and just under 300 of them hold positions that will lose their exempt status under the new rule.

Business leaders may choose to keep newly nonexempt employees as salaried even though they will be entitled to overtime if they work over 40 hours a week. While taking that approach could raise morale by allowing workers to retain the prestige of being salaried, it won’t save employers any money or effort. Overtime pay must still be calculated based on the worker’s hourly rate, Ferrero says.

In analyzing the impact of the new regulations, it’s important to consider indirect costs as well. Even when organizations can afford to bump up salaries so that employees can meet the higher threshold and remain exempt, doing so can cause another problem: salary compression.​​

That occurs when one employee’s annual compensation gets close to that of a more experienced colleague or even a manager, creating pressure to realign salaries up the ladder. The ripple effect can wind up costing an employer far more than the initial expense of boosting only the salaries of those affected by the new threshold.

Strained compensation budgets will likely prompt companies to require employees to work more efficiently. For instance, Roberts says, “supervisors will need to be sensitive about assigning tasks late in the afternoon. We’ll be training our managers on that."

Recruiting Challenges

​​In deciding how to respond to the new regulations, HR professionals must also consider the impact of reclassification on benefits and recruitment.

While the federal Affordable Care Act has all but eliminated the option of varying medical benefits by hourly and salaried status, salaried workers may have more-generous vacation leave and other paid time off, says Zack Pace, senior vice president of benefits consulting at CBIZ Inc. in Columbia, Md.

Moreover, “within certain industries, including construction and retail, employer-paid group life and group disability benefits might only be offered to salaried employees,” Pace notes.​

In terms of recruiting, HR and hiring managers may have a more difficult time luring candidates for middle management positions, says Kristi Jones, talent acquisition manager for H&R Block based in Kansas City, Mo.


Kristi Jones, H&R Block‘It will be an especially hard selling point for managers—to tell people they are expected to manage a team as an hourly worker.
—Kristi Jones, H&R Block


“It will be an especially hard selling point for managers—to tell people they are expected to manage a team as an hourly worker,” Jones says. “Salaried employees receive unlimited vacation, while hourly associates must accumulate vacation. That’s a perk to being salaried.”

And the rise in management labor costs will force cuts in recruiting and entry-level hiring, says Eric Oppenheim, SHRM-SCP, executive vice president and franchisee of Republic Foods, where he manages the operations for 17 Burger King restaurants in the Washington, D.C., area. As a result, fewer workers will get promoted to management, he says.

Tracking Hours

​While the overtime rule doesn't mandate that employers use any specific method for recording work hours, it does require the records to be accurate. So simply filing the weekly work schedules with an i​ndividual’s hours listed as 9 a.m. to 5 p.m. won’t suffice, attorneys say.

“Of particular concern for employers is the risk that employees will underreport hours worked and then later present claims for alleged off-the-clock work, likely at overtime rates,” says Paul DeCamp, an attorney with Jackson Lewis in Reston, Va.

Scheduling, tracking hours and managing overtime can be especially difficult in the hospitality industry, where the volume of business can fluctuate with changes in the weather or other demands outside the employer’s control, says Michael Layman, vice president of regulatory affairs at the International Franchise Association in Washington, D.C. 

Telecommuting Reductions

Other repercussions of the rule change may be reduced telecommuting options for newly reclassified workers and new restrictions on the time employees spend using smartphones for work purposes.

“The change from exempt to nonexempt does not require that an employer change its telecommuting arrangements,” says Denise Drake, an attorney with Polsinelli in Kansas City, Mo. “It does require a change in the employer’s policies, expectations and monitoring of the employee’s work.”

And it may necessitate a modification in a telecommuting employee’s work habits.​

“An employee who liked to work at varying hours of the day, whenever it suited his or her schedule, may need to be limited to certain core working hours,” Drake says. Reclassified employees will need to carefully record all time worked, she notes.


As of Dec. 1, professional employees earning less than $913 a week will be eligible for overtime. 

Source: U.S. Labor Department.


Several studies have shown that employees who use smartphones tend to work longer hours, because they can often easily access company e-mail and files in the evenings and on weekends. They may need software to help them track hours, too.

HR can help managers and business leaders to set a tone indicating that people aren’t being asked to work on their off-hours, says SAP Chief Human Resources Officer Stefan Ries.

“Don’t expect employees to answer an e-mail within the next five minutes” of it being sent, he says.

For those looking for a silver lining, the new rule could provide HR professionals with the opportunity to retool job descriptions that should have been updated long ago. It may also give leaders an impetus to be more creative and resourceful about how work gets done.

“It’s a really great opportunity for HR professionals to shine,” says Sellen Construction’s Lindgren. “This is where we show our value to the business and how we solve these issues and engage our employees, but keep an eye on the bottom line and come up with lots of different solutions to the problem.” 

WEIGHING YOUR OPTIONS

For each affected employee newly eligible for overtime pay, employers have a number of options, each of which carr​​ies risks and opportunities.​​

Increase salary to minimum level required to retain employee’s exempt status.
RISKS

  • Could create salary compression and result in higher-than-expected costs as compensation must be realigned up the ladder.

OPPORTUNITIES

  • Could improve morale by giving additional compensation and retention of exempt status.

  • Saves employer time by eliminating need to track, record and report hours worked.

Pay overtime premium for overtime hours worked.

RISKS

  • Increases costs for employers.

  • Could create liability for employer if it fails to track, record and report all hours worked.

  • Could damage morale as previously exempt positions may carry less flexibility and offer fewer benefits.

OPPORTUNITIES

  • Could improve morale by giving additional time-and-a-half compensation.

  • Promotes concept that all employees are paid when required to spend time away from family and other nonworking pursuits.

Reduce or eliminate overtime hours; hire extra workers as needed.

RISKS

  • Could lead to loss of productivity.

  • May require training for supervisors of newly nonexempt workers.

  • Could damage morale as previously exempt positions may carry less responsibility and flexibility and offer fewer benefits.

  • Could create liability if employer bans overtime hours but employees work them anyway. (Employer still must pay the overtime, but may discipline employees.)

OPPORTUNITIES

  • Creates opportunity to reclassify jobs and retool job descriptions and responsibilities.

  • Offers chance to be more creative and resourceful in how work gets done.

  • Minimizes employer costs so part-time help can be added.

Decrease pay allocated to base salary (provided employee earns at least minimum wage) and add compensation to account for time worked in excess of a 40-hour workweek.
RISKS

  • Could create liability for employer if it fails to track, record and report all hours worked.

  • Could damage morale as previously exempt positions may carry less flexibility and offer fewer benefits.

OPPORTUNITIES

  • Holds employer costs constant. 

  • Minimizes employer costs so part-time help can be added.

Restructure the workforce, transferring duties from newly nonexempt workers to those who have had their salaries increased to remain exempt.
RISKS

  • Could prompt employee concerns about equity and fairness.

  • May require training for supervisors of newly nonexempt workers.

OPPORTUNITIES

  • Creates opportunity to reclassify jobs and retool job descriptions and responsibilities.

  • Offers chance to be more creative and resourceful in how work gets done.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Allen Smith, J.D., is the manager of workplace law content for SHRM. Dori Meinert is senior writer/editor for HR Magazine. Also contributing to this report were Steve Bates, Roy Maurer, Dana Wilkie and Aliah Wright.

Illustration by Philippe Lechien for HR Magazine

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