[Editor's note: A federal district court has granted a preliminary injunction blocking the overtime rule from taking effect Dec. 1.]
This is the final story in a three-part series about how organizations are complying with the DOL's new overtime regulations.
In recent months, WorkSmart Systems has advised more than 100 client employers with a collective 5,500 workers on how to comply with the Department of Labor's new overtime regulations. To date, the firm estimates that 18 percent of those workers will need to be moved from exempt, salaried status to hourly wages.
That's nearly 1,000 employees.
So how are the reclassified workers handling the news?
"The reaction has been all over the board," said Jason Carney, HR director for WorkSmart, an Indianapolis-based company that provides HR services to small and medium-sized employers. "The news has been met with everything from 'I didn't go to college for four years to punch a clock' to 'This is great; I finally get paid overtime!' Every employee is different and driven by their own experiences in the workforce."
HR departments at companies across the nation are facing perhaps one of the most difficult communications challenges they've ever encountered: how to tell salaried workers who often toil as long as it takes to get the job done that they now must keep track of their hours and leave assignments unfinished after their 40-hour workweek. Along with that comes the chore of dealing with the anger or resentment of workers who feel that by being stripped of their exempt status, they are being demoted.
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 40. If employers want employees earning below the threshold to remain exempt from overtime pay, they must bump these workers' salaries to at least $47,476.
[Part One of the series: Overtime Rules Create Reclassification Conundrum]
Led by Texas, 21 states filed a lawsuit Sept. 20 challenging the new overtime rule. The U.S. Chamber of Commerce, the National Federation of Independent Business, the National Retail Federation and other business groups brought a separate legal challenge of the rule.
Workers may view their salaried positions as a sign of prestige—an acknowledgement that their skills or educations qualify them as professionals rather than blue-collar employees who must keep close track of the hours they work and the breaks they take, and who must get managers' approval to work overtime.
Christian Antkowiak, counsel in the Labor & Employment section of Pittsburgh-based Buchanan Ingersoll & Rooney PC, said most of his clients "are in the process now of formulating their communications plan with an intent to roll out communication likely in in November."
"The primary message has been to focus on the 'cost-neutral solution'—that employees shouldn't expect an overall change in their gross earnings," he said. "Employers also appear to be focused on a 'feel good' message about the employee's value to the organization. The hope is that they can blunt the perception that moving from salaried to hourly is a professional stigma."
Bethany Holliday, SHRM-CP, who is HR director for St. Louis-based The Cornerstone Insurance Grouop and Cornerstone Employer Solutions, suggests that managers let "employees know that the company is complying with new regulations and as such, wants to make sure the employee is properly compensated for their time worked. Explaining that the company cares about the employee's personal time and therefore wants to ensure that overtime is kept to a minimum helps as well."
[Part Two: The Nuts and Bolts of Complying with the New Overtime Regulations—hours, costs, consultants and coordination.]
Despite such "feel good" messages, some employers are worried that reclassification will affect worker morale.
"One of my clients in particular has two retail store managers that need to be reclassified," said Deanna Arnold, SHRM-CP, president of Cornelius, N.C.-based Employers Advantage LLC, whose HR consultants are advising clients on the overtime regulations. "The owner is concerned about the employees' perception of being changed from exempt to nonexempt and the impact it will have on their morale. He feels that the employees will see it as a demotion or that their role isn't at the level in which it was before. "
To address this, she said, her client moved these two workers from salaried, exempt status to salaried, nonexempt status and limited their hours to no more than 40 a week.
"Even though they still have to track their attendance, they still get that same salary every week," Arnold said. "I think the regulation changes will make salaried nonexempt more common than it has been over the years."
Employee reaction to reclassification has been decidedly mixed, those interviewed for this series said.
Taking reclassification particularly hard, Carney said, are those working at nonprofit organizations and lower-level workers in other industries who believe that putting in extra hours will help them win promotions.
"Many employees who have chosen a career of service are offended that they now have to limit their work to 40 hours a week and don't feel as though they can accomplish their mission," he explained. "We've seen this same reaction among entry-level and upwardly mobile employees who take pride in working well over 40 hours a week and see it as the best way to advance their careers. I've gotten reactions from employees, especially in the service industry, who feel that being limited to 40 hours a week inhibits their growth and doesn't give them the ability to put in the extra work they see as necessary to seek a higher management role."
Other effects of reclassification, those interviewed said, include less time for previously exempt workers to socialize with colleagues, an increased workload for those who remain exempt, worries that the newly reclassified will appear unproductive because they can only work 40 hours, and resentment at being told—perhaps for the first time—that one must "clock in" and keep strict accounting of hours worked and breaks taken.
"There have been some grumblings about having the employees now clock in and out who haven't had to do that in the past," Arnold said. "One employee in particular worked 16.5 hours of overtime his first clocking pay period because that is what he typically worked to get the job done. It was a real de-motivator to tell him he had to limit his hours to 40 in a workweek, and now he is concerned his reduced level of productivity will negatively impact sales."
Arnold tells of another worker who felt insulted that she had to clock in and out.
"She perceived it as a demotion and she was very upset with the change," she said. "She felt like it was not fair that her hours had to be tracked and she had to actually work 40 hours to get paid for 40 hours at an organization that had established 37.5 work hours a week [for exempt employees]."
Carney said "there have definitely been concerns that [exempt employees'] workloads will be increasing as a result of taking on duties from nonexempt employees, but I don't feel as though this will be an epidemic."
He also said that it has been a jolt to previously exempt workers when they have been told they shouldn't show up at work before their assigned time, even if they just want to schmooze with co-workers.
"Many salaried employees are used to getting to work 20-30 minutes early, casually making coffee, socializing," Carney said. "Those employees who are newly classified as hourly are being told they are not to spend extra time in the office to avoid real or perceived overtime. We have seen a generally negative effect on morale as a result of this."
Those taking the news best appear to be employees who are truly performing exempt activities—and hence receiving salary increases—and newly nonexempt workers who are earning overtime.
"These two changes increase compensation and therefore morale, especially for those overlooked hard workers who were in need of a much-deserved pay hike," said Gretchen Van Vlymen, who is head of HR for StratEx, which provides HR software and consulting to the hospitality and restaurant industries. "In fact, in a lot of these situations, we find that some of these workers may have been misclassified for some time."
Benjamin Walker, CEO of Denver-based Transcription Outsourcing LLC, reclassified his five workers as nonexempt and now pays them overtime—a move that he estimates costs him 15 percent more in wages each month.
"We had an open discussion about it and let our people say whatever was on their mind and worked it through together," he said. "They didn't mind moving from salaried to hourly one bit because they are getting paid for the actual number of hours worked. Everyone, including myself, is extremely happy with the set-up. My employees are happier to be making a little more money each month."
Attorney Tom Reddin, a shareholder with Dallas-based Winstead, advises the hospitality industry—among others—on the overtime regulations. What he hears from clients, he said, is that "employees appear gratified and appreciative of being paid extra when required to spend time away from family or pursuing nonwork interests. This was attributed somewhat to the Millennial generation's belief that they work to live and don't live to work."
Training for Managers and Formerly Exempt Workers
Another challenge presented by reclassifying workers is training those workers to conduct themselves as hourly employees and training their supervisors to manage them.
"Changing both the managers' and the employees' behavior is going to be particularly challenging, especially when those teams have worked together for years as exempt employees," Arnold said.
"It's going to be important that managers understand the full scope of how they will need to manage the employees differently. For example, it will become important to pay attention to what work they may do off hours and to make sure that they are getting paid for that time."
Van Vlymen said employers must decide whether to require these formerly exempt workers to use a "punch-in/punch-out" time card method to clock their hours, or "honor time sheets" on which employees declare their hours after each day's shift. Workers will need training on how to properly record their time.
"This will definitely be burdensome for upper managers who are required to edit or approve more time sheets each week," she said. "They have to hunt these employees down if they forget to punch in or out, or forget to complete their time sheets for the week."
And workers need to be reminded that if overtime is not approved, they must keep a close eye on the clock—something they may have never done in the past.
"When someone is conditioned to a more flexible schedule and working over 40 hours a week because they are exempt, it may be an adjustment for them to now be more aware of their schedule," Arnold said.
Holliday recommends that employers create a strict overtime approval policy.
"While the employer is responsible for paying overtime if the employee works it, should they fail to get approval beforehand, the company can discipline the employee accordingly," she said. "This will help ensure the company doesn't have overtime abuse and will keep the managers accountable for the time their employees are working."