Making Sense of New OT Rules

By Mike Boyer

The federal government is giving more than 4 million white-collar workers, including an estimated 133,000 in Ohio, an early Christmas gift on Dec. 1, but their employers may find it to be more like a lump of coal.

The Department of Labor’s new overtime rules updating the Depression-era Fair Labor Standards Act take effect on that date extending time and half pay for working more than 40 hours a week to those salaried workers making less than $47,476 a year, or $913 a week. That’s nearly double the old threshold of $23,600 annually, or $455 a week.

There are a few other new wrinkles in the first update of the salary threshold in 40 years including a requirement to update the salary threshold every three years based on wage growth over time.

“It’s a pretty big deal,” says Angela J. Gibson, employment law partner in the Cincinnati law office of Vorys, Sater, Seymour and Pease. “It will affect employers in some industries more than others, such as retail and restaurants, with managers making less than the $47,476 and treated as exempt. Those companies are going to have to make a decision whether to bump up pay [to retain the employee’s exemption from overtime] or pay them overtime,” she says.

It sounds simple, but like a lot of issues involving wages and hours it’s not.overtime_2

“There’s a lot of confusion [among employers],” says Scott Warrick, attorney and a human resources consultant near Columbus. One problem, he says, is that during the DOL’s two-year-old rule-making process a lot of proposals were floated that were not part of the final rules issued in May.

“There’s a lot of stuff put out by human resource associations and law firms that is just totally speculative,” he says.

One thing the changes have exposed is that a lot of employers don’t understand the Fair Labor Standards Act (FLSA), say Warrick and Gibson.

“What we’re finding is lots of employers are calling and are worried about these changes,” Gibson says. “They think they have these people who were exempt and now they’re not going to be because they don’t make enough. And when we get down to it, it turns out these people weren’t exempt even under the old rules. They should have been paid hourly all along.”

That’s because salary is just one part of what the FLSA uses to determine who is exempt from overtime requirements and who is not. To claim a white-collar exemption from the overtime requirement, generally three things are required: The employee must be paid on a predetermined and fixed salary that’s not subject to reduction because of variation of the quantity or quality of work performed; they must meet the minimum salary level; and the employee’s job duties must primarily involve one of several tests for executive, administrative, professional, outside sales or computer employees.

“There is a misconception that as long as an employer is paying someone on a salary, then that’s it, they are exempt,” Gibson says. “In some cases their salary may be high, more than $50,000, but they don’t look at whether the employee falls under the duties test. That’s something that unless they get legal counsel they almost always don’t pay attention to.”

To qualify for the executive exemption under the duties test, for example, the salaried employee has “to direct the work of two or more people,” Gibson says. “That means at least two or more subordinates under them and the employee has to have the authority to hire or fire those employees or make meaningful recommendations on that.”

For many employers, particularly professional service firms such as accountants and lawyers, salaried staff is already paid more than $47,476 annually and won’t be affected by the change, says Adam Berebitsky, CPA and co-leader of BDO’s restaurant practice in Cleveland.

The change will have a much bigger impact on the retail and restaurant industries that typically have a number of assistant managers. Still, he says, the overtime requirement won’t have as big an impact on the restaurant industry as proposals to raise the minimum wage to $15 an hour.

“That would significantly impact the restaurant and retail industry,” he says.

According to one restaurant industry pay survey he cited the average pay for assistant managers is about $32,545. Raising the pay of those employees to $47,476 to make them overtime exempt is financially unfeasible, so restaurant operators are looking at reclassifying those employees as either hourly or salaried non-exempt, maintaining their current pay level and managing the overtime they work.

Limiting overtime in the restaurant industry is a challenge. It’s not unusual for restaurant manager to work 50 hours a week, so in some cases exempt managers and general manager may be forced to pick up more of the workload, he says.

Nonprofits are also facing challenges with the new overtime rules, says Warrick.

“They’re on a fixed budget. They rely on grants and government funding,” he says. “If you’re a profit business, like Joe’s Tire Shop, you can do things to increase revenues like increase marketing or have a sale, but there’s little nonprofits can do to increase revenue. For some of my nonprofit clients their 2017 funding is already set.”

Since they can’t raise salaries and can’t afford to pay overtime to managers that may mean they have to limit or cut some of the services they provide, he says.

So what’s an employer to do if an employee doesn’t make the new $47,476 salary minimum and meets the qualifications under the duties test?

“You’ve got to do an analysis,” says Gibson. “First, figure out which employees qualify as exempt and which don’t. Then look at how much they’re making now and how much they work per week.”

For example, say the employee makes $45,000 a year and works an average of 10 hours of overtime a week. Based on working 50 hours a week, their hourly rate would be $17.31. Time and a half times 10 hours a week would be $259.62 a week, or about $13,000 a year in overtime.

“It would make more financial sense to increase their pay by say $3,000 a year and you don’t have to worry,” she says.

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The employer issues don’t stop with deciding whether to pay overtime or not. There’s also significant training required.

Berebitsky says once employers determine which employees are affected by the changes they need to communicate the changes and the reasons for them to employees.

“A lot of assistant managers are going to equate the changes to an hourly basis and may think they’re making less than hourly employees who rely on tips. There are concerns about perceptions,” he says.

It’s a cultural issue for some businesses.

“You’ve really got to make sure you re-educate [people going from exempt to non-exempt],” says Warrick. “For some folks there’s great crying and gnashing of teeth because their self-esteem is tied to being salaried.”

“You’ve got to start keeping track of employee hours and that can be tricky for a lot of businesses, especially for employees who used to be exempt,” says Gibson.

They have to know how to log their time and that they can’t be working at night at home or on their lunch hour because that can be compensable overtime.

Business critics of the new rules hope a legal challenge or Congressional action could delay the Dec. 1 implementation date, but that doesn’t mean businesses shouldn’t be taking action now. Failing to be in compliance is expensive.

In addition to facing a possible DOL enforcement action, employees can bring a civil action and if a court determines it’s a willful violation, damages can be doubled or tripled. In addition, Gibson says the FLSA is one of the few statutes that require payment of plaintiff’s attorney’s fees.

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