Concerns Over Overtime

Employers are cautiously awaiting more details from the Obama administration on its planned overhaul to the nation's overtime rules. Experts say any move to replicate California's overtime regulations would mean big headaches for companies.

By Andrew R. McIlvaine 

President Barack Obama's recent announcement that he would direct the Department of Labor to increase overtime protections for the nation's workers may be only the start of efforts by his administration to make substantial changes to the Fair Labor Standards Act -- and the ensuing publicity will mean employers can expect even more scrutiny on these matters from their employees.

"Obama's picked on one little thread sticking out of a very tattered piece of legislation -- the FLSA," says David Lewis, founder and CEO of OperationsInc, a Norwalk, Conn.-based HR consulting firm. "So where's he going to stop? With each change comes a greater portion of the population that would be affected by the changes, and they all translate into more pay and more costs for employers or forcing them to make some pretty significant changes to how they staff certain missions within the organization."

The publicity over the overtime changes as well as others the president may decide to make to the FLSA will generate lots of media coverage, says Lewis -- which will, in turn, lead many employees to question their own wage-and-hour classification.

"Just imagine, the web and blogs are filled with all sorts of data suggesting that a double-digit percentage of the workforce is misclassified -- you're going to have a lot of people thinking 'I work 50 to 60 hours a week, shouldn't I be getting overtime?'" he says.

Even worse, says Lewis, they may bypass HR altogether and go straight to the Labor Department.

"I will go out on a limb -- and it's not too much of a limb -- and say that the reason people will get reclassified, if or when this revision by the president goes into effect, will be mostly because of employees stepping forward, and far less from enforcement attempts by the DOL," he says.

The FLSA is already the subject of much litigation against employers: According to a 2012 analysis by Chicago-based law firm Seyfarth Shaw, wage-and-hour lawsuits have increased by more than 400 percent within the past two decades.

The FLSA's current overtime rules restrict any salaried employee making less than $455 per week from being classified as exempt. Critics say that limit is too low: It means many employees making just under $24,000 per year are ineligible for overtime pay even if they put in substantially more than 40 hours per week.

"$455 a week is an outdated number in the 2014 economy, so I understand the administration's desire to update it," says Joe Schmitt, an employment attorney and shareholder at Nilan Johnson & Lewis in Minneapolis.

The administration also wants to close what it says is a loophole in the FLSA that lets employers treat many workers as overtime-ineligible managers, even if they're performing much the same work as their hourly colleagues.

"I think that's wrong, the president thinks that's wrong," DOL Secretary Thomas Perez said in a speech last month at the International Association of Fire Fighters legislative conference in Washington, according to the Associated Press.

The DOL may also focus on narrowing the administrative exemption, perhaps tightening the definition of what constitutes independent judgment and discretion, says Bob Sheeder, an employment attorney with Bracewell & Guiliani in Dallas.

The nation's business community is cautiously awaiting the new wage limit the administration will decide on (unannounced as of now) and whether it will model the proposed changes on California's overtime law, which puts greater restrictions on employers than the FLSA currently does, says Schmitt.

California's law -- unlike the FLSA -- imposes a percentage requirement on the exemptions in addition to the primary duty task. In other words, to be considered exempt under California law, at least 50 percent of an employee's work time must be devoted to exempt (executive, administrative, professional) activities.

"My concern is the adoption of the California system on the federal level -- that would be very burdensome for employers and result in a lot of employees being classified as nonexempt," says Schmitt.

If the administration does decide to apply the California model nationwide, he says, the decision will have three major effects on employers: The process of determining whether a worker is exempt or nonexempt will become much more complicated, far more employees will end up being reclassified as nonexempt and employers will be dealing with much more litigation.

"It's going to be a plaintiff lawyer's dream," says Schmitt.

California also recently changed its law so that by 2016, no employee making less than $800 per week can be classified as exempt. Should President Obama choose a number close to that, says Littler Mendelson shareholder Tammy McCutchen, employers will need to state their case loudly and clearly that this would be a severe economic hardship.

"That wage level may make sense in Los Angeles, New York and San Francisco; it does not make sense in Waterloo, Iowa," says McCutchen, who oversaw the last major FLSA revisions in 2004 as wage-and-hour administrator under President George W. Bush.

In the rural Midwest and South, setting the exemption level that high will cover a vast number of employees, given the lower wage levels and lower cost of living in those areas, she says. 

"$455 a week may sound ridiculously low in New York City, but not in Sioux Falls, S.D.," says Schmitt. "But I would predict that the DOL under this administration will be more concerned with the coasts than the heartland."

Given the differentials in cost-of-living, he says, the appropriate wage level may be an issue best left to the states.

Now is probably a very good time for HR departments to carefully evaluate their exemptions, ensuring that employees classified as managerial, professional or administrative are actually spending the bulk of their time on such tasks, says Lewis.

"If you have 'player-coaches' -- managers who are very much doing the jobs of the people they're managing in addition to their managerial duties -- then the economic impact on your organization [of changes to the FLSA] could be huge," says Lewis. "In many cases, these employees are putting in 15 to 20 hours per week beyond 40 hours."

If many of those managers end up being re-classified as non-exempt, says Lewis, then their employers will be faced with a difficult choice: Reduce their hours to 40 hours a week and hire part-timers to take up the slack, or pay that person significantly more money.

"If you can't afford that additional expense, then figure out how you're going to reduce that person's workload and essentially have that manager do less in order to get down to a 40-hour week," he says.

Companies that are "top-heavy" with exempt employees may face greater scrutiny, says Sheeder.

"If you have one manager-exempt employee for every 10 hourly employees, you're probably going to pass muster with the DOL much more easily than if you have 10 exempts for every non-exempt," he says.

Most experts agree that the rulemaking process for the overtime changes will take at least 12 to 18 months -- enough time, Schmitt says, for employers to ensure their voices are heard during the process' public-commenting period.

One potentially potent weapon for employers, says McCutchen, would be commentary from workers who would prefer to remain exempt.

"President Obama may think most employees want to be non-exempt, but there are many employees who consider themselves professionals who have no desire to punch a time clock," she says. "There's a trade-off for everything: If you're exempt, you don't get overtime but you also can't be docked pay for working less than 40 hours a week, so you have more flexibility. There's always two sides to every story, and the most compelling is testimony from an actual employee."

Apr 15, 2014
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