Overtime Proposed Rule Will Result in ‘Hard Choices’ for Some Employers

By Allen Smith Jul 20, 2015
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Employers will face many complicated operational issues as a result of the overtime proposed rule, issues they should consider well in advance of a final rule, according to Alex Passantino, an attorney with Seyfarth Shaw in Washington, D.C., and former acting administrator with the U.S. Department of Labor’s (DOL’s) Wage and Hour Division.

The proposed rule will “force certain employers to make some hard choices,” agreed Michael Arnold, an attorney with Mintz Levin in New York City. “Employers facing rising labor costs will be forced to ask: Do we pay our employees more to keep them exempt? Do we pay them less and/or reduce their hours to minimize overtime costs? Do we eliminate or reduce benefits provided to these previously exempt employees? Do we hire more workers to account for any hours shortfalls? And so on.”

Increased Pay

How employers react “will depend on the employer and it will depend on the position,” Passantino told SHRM Online. “An employee earning $49,000 is more likely to get a raise to maintain the exemption than would an employee earning $40,000 (assuming both otherwise meet the duties tests). On the other hand, an employee at Company A earning $42,000 and an employee at Company B earning $45,000 in a similar role may get treated differently. Company A may decide that the administrative expense and overtime costs do not merit the increase in pay and will convert to nonexempt; Company B may decide otherwise and give the employee a raise.”

The estimated cutoff amount for exempt workers in 2016 is $50,440, according to the proposed rule.

“For those currently exempt employees between $23,660 and $50,440, there really is nothing close to a bright-line test on how to handle” reclassification, Passantino added. Employers may decide to change job duties to shore up exempt status and justify the raise; they may cut hours and convert to nonexempt.

He added, “Ultimately, it will require careful consideration of the business issues and legal issues to determine what the right course of action is for a particular employer and a particular employee. Because of the potentially consequential impact on budget, staffing and resources in 2016, employers should be considering these issues now. You don’t want to wait until the final rule to realize that you need to increase 250 employees by $5,000 each to ensure that they are still exempt.”

He observed that “Employers will handle this in a wide variety of ways—DOL itself only thinks that 71,000 of the 122 million workers (that’s 0.06 percent) in the United States will get a straight-up salary raise.”

Part-Time Workers

As for cutting the hours of existing nonexempt staff and increasing reliance on part-time workers at lower wages, Arnold noted, “The FLSA is designed to lower hours so employers will be forced to employ more people, thereby lessening the unemployment rate, which is a net positive viewed collectively. At the same time, fewer hours means less pay for certain individuals, which many say undercuts the purpose of the proposed rule and which is certainly a net negative viewed individually. For other individuals who want to work fewer hours, this is actually a net positive.”

He said, “In the end, it will come down to an industry-specific, employer-specific and job-specific analysis to determine whether it’s desirable or even feasible to lower hours and hire new workers.”

Cuts in Benefits

Then there are the benefits issues for those reclassified as nonexempt.

“Newly nonexempt workers may no longer be eligible to participate in certain employer benefit programs,” Arnold observed.

“Many employers have different benefits plans for exempt and nonexempt employees,” Passantino explained. “Conversion to nonexempt means that the employee gets the nonexempt benefits. Employers are, of course, free to make changes to the benefits plans they offer in accordance with their plan’s terms. Because many of those changes will be time-sensitive, it again counsels for a prompt review of exempt status.”

Employers that choose to increase base salaries to maintain exemptions may also decide to eliminate certain benefits to offset costs, Arnold noted. If that’s the case, “The worker is likely losing benefits he or she has probably grown accustomed to receiving and it could cause morale issues and otherwise make it more difficult for an employer to retain talent,” he observed. “So, again, the employer has difficult choices to make.”

Neutral Cost Structure

“Employers probably will strive with any changes to have a neutral cost structure,” said Joel Rice, an attorney with Fisher & Phillips in Chicago.

Policies could be set to discourage overtime, so that an employer could get to a neutral cost structure without cutting benefits, he said. For example, there could be policies requiring preapproval by management to work overtime. Overtime worked in violation of the policy must be paid, but an employee may be disciplined for such work.

An employer may rely more on the fluctuating workweek method for calculating hours if work hours vary and if there is mutual agreement to use this more favorable method for employers, Rice suggested.

Another cost-saving measure might be to redesignate the workweek. The employer can’t arbitrarily flip back and forth with the workweek, Rice cautioned. But the employer may discover that if it changes the workweek to Wednesday to Tuesday, for example, it will capture hours in a different way and be less likely to have overtime than if it stuck with a Sunday to Saturday workweek. An employer should give notice to employees if it’s going to change its workweek, he noted.

“The proposed rule affects different employers in different ways,” Arnold said. Its effect “will depend on factors such as the strategic goals of the organization, its business model, the type of industry and regions in which they operate, the overall competitive landscape, the organization’s culture, and so on. After running that analysis, each employer will decide how, if at all, they will change their pay practices to satisfy the dictates of the new rule.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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