Overtime Rule Change Bad for Business?

HR, labor advocates make their case; SHRM stresses threat to workplace flexibility

By Stephen Miller, CEBS Jul 24, 2015

Update: Overtime Rule on Hold

On Nov. 22, 2016, a federal district court judge in Texas placed an injunction, effective nationwide, on the Department of Labor’s overtime rule revision, preventing it from taking effect on Dec 1. The injunction casts doubt on whether the revised rule will go forward at all (see the SHRM Online article Federal Judge Halts Overtime Rule). For now, the rule’s implementation and enforcement are on hold. SHRM Online will continue to monitor and report developments.


The Department of Labor’s (DOL’s) proposed rule to expand mandatory overtime pay under the Fair Labor Standards Act (FLSA) would present such a financial hardship that many small companies and community service providers would be forced to close, representatives of those organizations say.

Elizabeth Hays, SHRM-SCP, is director of human resources at Mars Home for Youth (MHY) Family Services, a Mars, Pa., nonprofit that serves at-risk youth. Testifying at a House subcommittee hearing on July 23, she detailed the blow the proposed changes would have on organizations that, by necessity, compensate employees at the lower end of the pay scale.

“Raising the exempt salary threshold under the new FLSA regulations to the $50,440 threshold literally presents the risk of [MHY Family Services] closing its doors,” said Hays, representing the Society for Human Resource Management (SHRM) before the U.S. House Subcommittee on Workforce Protections.

Most of her organization’s exempt employees are paid less than $50,000 and would become eligible for overtime under the proposal. “If these regulations were to be implemented as proposed, MHY will likely have to decrease services because we would not be able to afford the additional overtime pay,” she said.

HR’s Challenges

Hays also presented comments from SHRM highlighting HR professionals’ concerns about the proposal, including that:

The significant increase in the salary threshold presents challenges for employers in industries with lower salaries and in certain areas of the country (rural areas and the Southeast and Midwest, as examples).

The automatic wage adjustments will influence employers’ compensation decisions on merit pay and contribute to salary compression. Adjustments also will have ripple effects for HR policies and have consequences for workers’ compensation, payroll taxes and employee benefits.

The fact that no changes to the duties test were announced has resulted in a period of uncertainty for employers. SHRM is concerned that the DOL still may change the duties test, which would require many employers to restructure their workforce. SHRM is calling for a full comment period for any changes to the duties test.

Expanding overtime eligibility will not necessarily result in a windfall of overtime income for newly classified nonexempt employees. Employers will likely cap or eliminate access to overtime work or adjust salaries to ensure that an employee’s total wages will remain the same.

Workplace Flexibility

Tammy McCutchen, former administrator of the DOL's Wage and Hour Division under President George W. Bush and an employment attorney with Littler, was among witnesses who addressed flexibility issues during her testimony. In response to a question from subcommittee chairman Rep. Tim Walberg, R-Mich., McCutchen said “a particular concern is the executive exemption where the Department of Labor has suggested they might adopt a California rule to require 50 percent of an exempt employee’s time to be spent only in exempt work, which [doesn't reflect] the realities of the workplace today.”

“We’re not in a 1930s industrial economy where you have union work and nonunion work,” McCutchen said. “We have exempt employees who, for employee morale and to make sure the businesses are running effectively, pitch in and do nonexempt work. And you shouldn’t lose the exemption when you walk to the copying machine and do your own photocopies rather than asking your secretary to do it. Those types of changes, I think, would be very concerning and not reflect the modern workplace.”

A related concern, she added, is “if we have another major change to the duties test, that we’ll see even more litigation.”

Separate written testimony co-signed by SHRM and submitted by the Partnership to Protect Workplace Opportunity (PPWO), an employers’ coalition, also addressed the proposed rule’s effect on workplace flexibility.

“The change to nonexempt status means that many employees would lose the ability to structure their time to address needs such as attending their child’s school activities or scheduling doctors’ appointments,” PPWO’s comments said. “Many other employees would lose the opportunity to work from home or remotely, as it can be difficult for employers to track employees’ hours in those situations. Employers are also more reluctant to provide nonexempt employees with mobile devices or may place restrictions on their use, as employers need to account for any time employees spend on such devices.”

Similarly, the proposed increase in the salary level would make it difficult to maintain part-time exempt positions. “Under the current salary requirement, a part-time, prorated salary is sufficient to establish the exemption (provided that the prorated amount exceeds $455 per week),” PPWO said. “The proposed new amount makes such an arrangement far more difficult, effectively eliminating some flexible workplace arrangements. If an employee’s prorated salary is not in excess of the new salary amount, that employee would now need to meticulously record his or her working hours, even if he or she never approaches 40 hours, because the FLSA’s ‘hours worked’ recordkeeping obligations apply to all nonexempt employees.”

Incentive Payments

Another issue that has not received much attention is “when employees are converted to nonexempt status, they often find that they have lost their ability to earn incentive pay (e.g., bonuses),” PPWO contended.

Under the FLSA regulations, the coalition explained, employers that provide incentive payments to hourly employees must include those payments in the employee’s “regular pay rate” for purposes of calculating overtime pay, even if the bonus is provided months after the overtime takes place. “Faced with the difficult recalculation of overtime rates—sometimes for every pay period in a year—employers often simply forgo these incentive payments to nonexempt employees rather than attempt to perform the required calculations,” PPWO warned.

Labor Advocates Have Their Say

Ross Eisenbrey, vice president of the Economic Policy Institute, a liberal policy think tank, testified in support of the DOL’s proposed rule, arguing that “the erosion of overtime rights over the last 40 years is emblematic of the erosion of the living standards of America’s middle class over the same time period.”

Echoing the views of others who contend it is not in the self-interest of employers to pay fair wages unless they face severe penalties for failing to do so, Eisenbrey said that “The loss of overtime protection for so many workers is just one of many changes in the rules governing our economy that have helped the elite and powerful at the expense of average working people.”

He added, “Workers who are exempt do not have to be paid a dime for the extra hours they work, whether it’s two hours or 20. In fact, they don’t even have to be paid the minimum wage, and some so-called managers have found themselves working so many hours that their effective hourly rate actually falls below the minimum wage.”

When asked by subcommittee member Rep. Marcia L. Fudge, D-Ohio, “is there any data that you’re aware of that supports the premise that higher wages causes job loss,” Eisenbrey replied, “No, I think that one of the big problems with our economy right now is that wages have been held down so long that the power of consumers has been reduced, and therefore businesses are not hiring; they don’t have the customers they need. That’s what every survey of small business says, by the way. That the problem is not regulations.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow Me on Twitter.​

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