Breaking the News: When Workers Lose Their Exempt Status

Expect resentment, resistance and lower productivity

By Dana Wilkie May 13, 2016
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Updated 5/18/2016 

It won’t be a picnic telling a worker who has long been salaried, never had to punch a time card and often worked after hours that all that’s going to change.

But when the U.S. Department of Labor publishes its final overtime rule (which happened May 18; see SHRM Online's FLSA Overtime Rule Resource page for full details), employers across the nation will have to notify exempt workers that their salaries don’t meet the federal threshold to remain exempt.

“Employers can expect many employees to feel hurt and under-appreciated,” said 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.”


FLSA Overtime Rule Compliance

For more overtime compliance news, tips and tools, check out the SHRM resources provided below:

· FLSA Overtime Rule Resources Guide
· Compliance Checklist · Infographic
The proposed changes to the overtime rule increased the salary threshold for employees who are exempt—and therefore not eligible for overtime—from $23,660 to $50,440. In the final rule, the level dropped to $47,476. Employers can either increase an exempt worker’s salary so the worker remains exempt, or reclassify him or her as nonexempt. Many are likely to do the latter.

Reclassified workers will—perhaps for the first time in their careers—have to track their start times, end times, break times and meal times.

“It will be hard to accept and even implement,” said Robert Boonin, immediate past chair of the Wage and Hour Defense Institute, a network of wage and hour lawyers, and an attorney with Dykema in Detroit, Mich.  “It'll be a cultural change to many and perceived as a step back in career growth.”

If an employer has different levels of benefits for exempt and nonexempt workers, that will have to be communicated as well, said Marie LaMarche, SHRM-SCP, labor relations division director for Tacoma, Wash.-based CHI Franciscan Health. (See "Overtime Changes Will Affect Employee Benefits, Too" from SHRM Online.)

“Typically we see this in [paid time off] or vacation accrual, and possibly long-term disability or life insurance,” she said. “Sometimes this change will be to the detriment of the employee; in other instances, the PTO or vacation accrual may increase by going to a nonexempt position, or rules concerning year-end cash-outs may be more favorable to an hourly employee.”

Nancy McKeague, SHRM-SCP, is senior vice president and chief of staff at Michigan Health & Hospital Association in Okemos, Mich. She said she will have to make changes in time card requirements, vacation and sick time accrual, and bonuses for reclassified workers.

“All of these changes will be viewed negatively,” she said, “and there is no way to dress it up and pretend otherwise.”

Communicating the Change

Well before the deadline to comply with the rule—Dec. 1, 2016—employers should be talking with workers who will be affected, said Christine V. Walters, SHRM-SCP, an independent workplace liability consultant and author in Westminster, Md.  “Begin the dialogue now,” she said. “Reduce the element of surprise. Share with them not just what may happen but why it’s happening [so] they understand it’s no reflection on their performance.”

One way to soften the blow is to point out that previously exempt workers will now be paid for after-hours work, said Patricia A. Wise, a partner with Niehaus Wise & Kalas Ltd. In Toledo, Ohio.

She pointed out that the new rule doesn’t require affected employees to become hourly workers. They can remain salaried but, if they work over 40 hours a week, they must be paid overtime premiums based on the per-hour rate of their annual salary.

“If the salaried basis is important to an employer’s employees, then it is probably important to use that method of compensation,” she said. 

In addition, managers will have to clear up confusion about the hours that reclassified employees should and shouldn’t work. One question formerly salaried workers will have, LaMarche said, is whether they can get all their work done in a 40-hour workweek.

“Relaying that they will now be paid overtime often brings about comments like, ‘Our department is not allowed OT, so that means I’m not going to get my work done,’ ” LaMarche said. “Often, employees feel that nonexempt means [working] 8 to 5 every day, and they can’t work a minute past that. But flexibility can still occur. If an employee needs to stay late for a specific task or meeting, then they can adjust their time on a different day during that week.”

Company Property

Salaried workers who take company phones and laptops home may have to be told to leave these items at work if they are reclassified, or they may have the property taken from them entirely to prevent them working after hours, said Kelly Stiles, HR manager for the city of Unalaska, Alaska.

“The idea of having hourly employees with phones and laptops is almost an uncontrollable variable, particularly if the employee is accustomed to checking e-mail after hours or taking phone calls outside of regular working hours,” Stiles said. “Tracking those potential OT hours alone would be a nightmare for any organization.”

Kilborn, however, said managers won’t necessarily need to take away company phones and laptops from exempt employees who become nonexempt. “In fact,” she said, “such measures may fuel employee upset that their status within the company has been lowered.” Instead, she said, managers can instruct employees on what types of work are authorized outside of normal working hours; how much time is authorized; and the necessity of recording all time worked.

Managers will also have to consider whether to allow reclassified employees to travel, and how to pay workers for travel time, said Tammy McCutchen, an attorney with Littler in Washington, D.C., and former administrator of the DOL’s Wage and Hour Division.

What about previously salaried workers who were used to responding managers’ e-mails or phone calls after hours?

“Managers can certainly continue to e-mail after hours and expect timely responses from newly nonexempt employees, [they] just need to be prepared to pay for the time,” Kilborn said. “Perhaps this is a chance for those managers to evaluate how badly they need that response from the employee if they know that they will be paying for it directly.”

Said Wise: “Regardless of what a supervisor may be used to … a manager may have to adjust expectations if response time would result in overtime, or an employer may have to consider financial ramifications if response time is critical and would require overtime.”

Finally, if reducing overtime costs means new hourly employees should no longer take calls or answer e-mails, will deadlines and productivity suffer?

“There will be no avoiding the need to shift priorities, tasks and responsibilities, which will have a direct impact on productivity,” Stiles said. “I am all for fair treatment and fair pay, but there is also the need to operate efficiently and cost-effectively. And I still believe the overall impact is going to be on employee morale which, goes without saying, will impact almost every area of the organization.”

Dana Wilkie is an online editor/manager for SHRM.

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