OT Rule Poses Challenges

The new rule will boost the number of workers who qualify for overtime pay. But experts say its effects on employers remain uncertain.

Thursday, May 19, 2016
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The Obama administration has finalized its much-anticipated boost in the pay threshold for workers who can be exempted from overtime. But the effects, though sweeping, are still uncertain for workers and employers alike.

Two years in the making, the rule will take effect Dec. 1 unless Congress blocks it. In most circumstances it requires overtime after 40 hours a week for workers whose full-time rate is under $47,476 a year. That doubles the current threshold of $23,660.

The new rule also establishes a mechanism for raising the overtime threshold every three years. The White House projects it will reach $51,000 in 2020.

One veteran labor lawyer says many companies have a lot of work to do -- and tough choices to make. Many nuts-and-bolts questions about the new rule have yet to be answered.

"Honestly, it's not as simple as they're making it sound," says Dena H. Sokolow, a shareholder with Baker Donelson in Tallahassee, Fla. "It's just not."

The Obama administration says the move will protect 4.2 million people who earn the same modest pay regardless of hours worked because employers classify them as salaried managerial or professional workers.

"Increasing overtime protections is another step in the President's effort to grow and strengthen the middle class by raising Americans' wages," the White House says.

But few workers will benefit, contends Littler Mendelson attorney Tammy McCutchen, a former Department of Labor administrator. Companies are "just going to reclassify employees and hold them to 40 hours, "she tells Politico. Workers "will not be seeing more pay in their paychecks."

The Society of Human Resource Management also says workers will be hurt. The new rule "will mean many employees will lose the professional 'exempt' status that they have worked hard for and the flexibility from rigid schedules that they care deeply about," said SHRM President and CEO Henry G. Jackson in a news release. "There likely will be fewer opportunities for overtime pay as employers are forced to restructure their compensation and"

The rule will hit some employers harder than others. Especially affected will be retail, education and nonprofit organizations that routinely classify workers with modest wages as exempt. They face a range of unpalatable choices, all likely to be expensive.

Companies may raise salaries for some workers who are near the new threshold. But in many cases, they likely will opt to turn them into hourly employees, labor lawyers say. This will mean paying overtime, reducing the hours they work or setting their hourly pay rates low enough that overtime doesn't push up their compensation.

Many small businesses will have the steepest climb, says Tara Wolckenhauer, division vice president of human resources at ADP.

 "We're getting a lot of questions around what steps businesses should be taking," Wolckenhauer says.  "A lot of this is new to them."

Her staff is advising HR staff to consider the options and think about internal pay equity as well as ways to minimize costs. They're also advising companies to be mindful of the new provision for revising the threshold every three years.

"Keeping that front-of-mind is important," Wolckenhauer says. "This isn't something that's going to stay stagnant."

The Obama administration says it took several steps to lessen the effects on business. Employers may count bonuses and commissions toward as much as to 10 percent of the new threshold, for example. The effective date of the rule will be extended from the usual two months to six in order to give companies more time to comply. And to simplify the transition, the new rule makes no change in the "duties standard" that -- along with pay -- must be met to classify a worker as exempt.

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The extended phase-in period is a big help to employers, says Sokolow. Many have already begun planning how to implement the rule, though they have been waiting for final language.

"I don't see one solution that's going to work for all employers," she says. Some might take a 60-hour job and split it between two 30-hour workers, for example. Others might cut benefits to control costs.

The challenges also include purely mechanical matters, such as keeping track of hours worked. Many employers don't have effective timekeeping systems in place, Sokolow says. And all will have to wrestle with the fact that tracking hours is hard in the age of an Internet-connected workforce.

Employee morale is another major consideration, she says. "That's especially going to be a big thing for the restaurant industry, where all these assistant managers are going to be hourly. A lot of these employees will feel it's a demotion."

Long term, Sokolow predicts, the rule change will mean more legal and regulatory challenges for companies. The Department of Labor is seeking a $50 million budget increase to fund increased audits, she says.

The new rule also sets the stage for more wage-and-hour suits against employers. "Last time they made a change, in 2004, there was a marked increase in actions," she says. "I think we're definitely going to see more litigation from it."

Sokolow also thinks companies should be prepared for more limits on which workers can be counted as exempt. Once the new rule has settled in, in a year or two, the Department of Labor may move to tighten the standard for job duties that qualify a position as exempt.

"I believe that's on the horizon," she says. "They're not done."

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