Overtime Rules Create Reclassification Conundrum

Employers must make decisions on whether to reclassify workers from exempt to nonexempt

By Dana Wilkie Sep 21, 2016

​This is the first in a three-part series about how organizations are complying with the DOL's new overtime regulations.

Upon learning this year that the Department of Labor's new overtime regulations would affect all the employees at his Denver-based company, Transcription Outsourcing LLC, CEO Ben Walker knew he had a laundry list of tasks ahead of him.

He'd need to consult with a lawyer. He'd have to get his mind around the regulations' somewhat complicated "duties test." He'd need to coordinate with his HR, accounting and payroll departments.

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He'd have to decide if it made more financial sense to boost salaries so his five employees remained exempt from earning overtime or to keep them at their current salaries and either pay them overtime or accept that they weren't going to work the hours they once did.

He'd need to figure out if any changes to his workers' exempt status meant changes to their benefits. He'd have to adjust the company's payroll and benefits records to reflect those changes. And then he'd have to find a way to tell workers of his ultimate decision.

With the Dec. 1 deadline for complying with the overtime rules fast approaching, employers across the nation face the same decisions Walker does.

"Most small businesses expect more hours from their [exempt] employees to save money," said Walker, who reclassified his workers as nonexempt and now pays them overtime—a move that he estimates costs him 15 percent more in wages each month. "Our employees were all middle- and upper-level management, and that seems to be the case with my friends and colleagues that own their own businesses."

Reclassification Conundrum

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. If employers want those earning below the threshold to remain exempt from overtime protections, they must bump these workers' salaries to at least $47,476.

Arguably the single most difficult task when complying with the overtime rules is deciding whether to reclassify employees, and if so, which ones.

Deanna Arnold, SHRM-CP, is president of Cornelius, N.C.-based  Employers Advantage LLC, which has six HR consultants advising clients on the overtime regulations. Many of those clients are nonprofit organizations especially affected because a majority of employees at nonprofits, she said, earn salaries in the $30,000 to $55,000 range for supervisory and administrative roles.  

"A lot of times employees at nonprofits tell us they are doing the work because they believe in the mission or love the work that they do more so than the paycheck," she said. Under the new regulations, "they will either be restricted to 40 hours a week, or they will need to receive an increase in compensation. As many nonprofits are already working with very tight budgets, many of them will not be able to provide an increase to so many employees."

Arnold is advising clients to spend some time tracking the hours that potentially affected employees currently work.

"One of the most cost-effective ways for employers to get the ball rolling is to start with a pay practices audit where we look at the number of employees who are affected," she said.

Attorney Tom Reddin, a shareholder with Dallas-based Winstead, advises the hospitality industry—among others—on the overtime regulations. He says that it appears most of his hospitality clients will increase salaries for clearly exempt employees and reclassify other employees, such as assistant managers.

"Some employers are definitely considering reducing or eliminating overtime hours and hiring extra part-time workers as needed," he said. "Concern was expressed, however, that this would lead to additional turnover which has always plagued the hospitality industry. I believe an unintended consequence will be that part-time employment will become the norm for many workers as a result of these new regulations, with lower hourly wages, no overtime and no benefits."

Many interviewed for this series agreed that those most affected by the new rules—in good and bad ways—are low-wage and mid-level managers in the nonprofit, hospitality, restaurant and retail industries.

"Middle managers who were properly classified as exempt are [largely affected] as many of them fall below the new $47,476 threshold," said Bethany Holliday, SHRM-CP, who is HR director for St. Louis-based The Cornerstone Insurance Group and Cornerstone Employer Solutions. "The majority of our groups are focusing on their mid-level management for salary increases. Many of these groups rely on these employees to work more than 40 hours and, in most cases, their salary is near enough the new threshold that it makes more financial sense to increase the annual salary and keep the employee as exempt."

A Challenge: The Duties Test

But salary is not the only category an employer must consider to keep a worker exempt from overtime. Employees who meet the revised salary test must also meet the "duties test" to be considered exempt. The Fair Labor Standards Act provides an exemption from minimum wage and overtime pay for those employed as bona fide executive, administrative, professional and outside sales employees.

For example, the requirements for exempting a "learned professional" employee include:

  • The employee's primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment;

  • The advanced knowledge must be in a field of science or learning; and

  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Gretchen Van Vlymen is head of HR for StratEx, which provides HR software and consulting specializing in the hospitality and restaurant industries. She said her team takes "a hard look at what [employees] are actually doing in their day-to-day job activities, not just their titles or what the 'industry norm' has been historically."

For employees that may fit into the executive duties test, for example, "We think about: How many employees' are they directly managing?" she said. "What are their responsibilities and how much control do they have over serious operational matters, like hiring or firing, scheduling shifts or cutting hours, or bargaining and dealing with customers and vendors on behalf of the business? Those employees who are directly managing two or more people, dealing or bargaining on behalf of the company, exercising control over significant decisions that influence the company's bottom line—they will probably be the employees who remain exempt and get the salary increases." 

Holliday said she and other consultants are discovering that many clients "either have no idea or a vague understanding of" the duties test and are focusing solely on the dollar threshold when deciding a worker's status.

"Without meeting the requirements of the duties tests, the dollar amount is moot," she said. "A company can have an administrative assistant who is making $99,000 a year. While this person is a very well-compensated assistant, the likelihood of their duties meeting the exemption requirements is slim, and therefore this person would still be eligible for overtime pay."

Neglecting the duties test could have serious implications in coming months, she said.

"Employees are smart and are often just as well-versed in the rules as their employers, if not more so. Companies cannot afford to run the risk of misclassifying employees when such a big spotlight is on these recent changes."

Compliance Complexities

Christian Antkowiak, counsel in the labor and employment section of Pittsburgh-based Buchanan Ingersoll & Rooney PC, said that his largest clients are in the satellite telecommunications, health care, and oil and gas industries. Those clients, he said, are having the easiest time deciding which employees should remain exempt.

It's the small- to medium-sized businesses, he said, that are struggling.

"Small businesses tend to be more entrepreneurial, and many of their employees wear different hats," he explained. "They employ folks who keep irregular hours and often work remotely. These companies will now face difficulties in terms of tracking and recording hours worked. They will also struggle with the added overtime costs and also the administrative costs in developing new time-keeping systems, as well as training costs."

For example, Antkowiak represents country clubs that employ assistant golf professionals, who generally earn less than the new threshold salary for remaining exempt—but their incentive pay often puts them well above the new threshold. (The new rules only permit 10 percent of nondiscretionary compensation to be included in the salary level calculation.)

Moreover, these employees typically work 10 months out of the year, and their weekly schedules fluctuate: They tend to work fewer hours at the beginning and end of the golf season, but 60 to 70 hours during peak season. 

These country clubs "are faced with difficult choices that may ultimately require a wholesale change to the way in which these assistant professionals are being paid," he said. "[The clubs] must consider whether to move them into a nonexempt role and potentially absorb significant overtime costs for the summer months. There are countless examples of small businesses with unique circumstances like this [for which the] rule-making simply doesn't fit." 

Part Two: The nuts and bolts of complying—hours, costs, consultants and coordination.


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