How to Prepare for the New Federal Overtime Rule

Introduction

[Editor's note: A federal district court has granted a preliminary injunction blocking the overtime rule from taking effect Dec. 1.]

​​​​​​​​​​​​​​​​​​​​The 24 general managers who keep Toppers Pizza’s corporate restaurants up and running work about 50 hours a week, sometimes more if an hourly worker calls in sick or quits suddenly. The managers receive a guaranteed salary plus bonuses and are exempt from overtime pay.

However, by December, their positions will most likely be reclassified as hourly nonexempt, or perhaps salaried nonexempt, to comply with the new federal overtime regulation.

The company’s HR manager worries how that change will affect morale. “Some of those general managers have been with the company nine years,” and switching them to hourly status could be perceived as “a slap in the face,” says Robin Gittrich, HR manager for the Whitewater, Wis.-based company. ​

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.

Toppers Pizza’s six area supervisors are already paid close to that higher threshold, and their salary will likely be bumped up so that they remain exempt from overtime. However, the company can’t afford to increase general managers’ salaries to that amount, Gittrich says.

She’s still trying to estimate what the company’s future overtime costs for managers will be. In the restaurant industry, managers “don’t know when someone is not going to show up for a shift, or when three people ask to go on vacation at once,” she says.

Toppers Pizza is among the hundreds of thousands of organizations nationwide scrambling to figure out how to comply with the new overtime regulation. More than 4.2 million additional white-collar workers in the U.S. will become eligible for overtime under the new criteria, according to the U.S. Labor Department. The annual salary threshold will be updated every three years, reaching more than $51,000 in January 2020 by Labor Department estimates.

The Impact

Opponents of the new rule argue that the requirements are too costly for employers and will hurt employees by taking away their flexibility and moving them from salaried positions to nonexempt status, which many perceive to be less prestigious.

“Employers can expect many employees to feel hurt and underappreciated,” says Alice Kilborn, SHRM-CP, a consultant on workplace litigation prevention in Albuquerque, N.M. “Many workers place a premium on the prestige of being considered an exempt or salaried employee—no matter how much we emphasize that it’s just a categorization of pay and not a reflection of importance or level of contribution. [It] may seem like they’re being demoted.”

The new regulation will cost private employers $1.8 billion in the first year, the Labor Department estimates. But opponents argue that the cost to extend overtime protection under the federal Fair Labor Standards Act will be significantly more. Among the organizations expected to be hardest hit are retail shops, restaurants, call centers, nonprofits and small businesses.

The new overtime rule is expected to cost private employers about $1.8 billion 
in the first year.
Source: U.S. Labor Department.

Among the organizations expected to be hardest hit are retail shops, restaurants, call centers, nonprofits and small businesses.

"These rules are a career-killer,” said David French, senior vice president of the National Retail Federation, in a written statement. “Most of the people impacted by this change will not see any additional pay. Instead, this sudden and extraordinary increase will mean more red tape and fewer advancement opportunities for salaried professionals.”

Other business groups opposed to the new regulations include the Society for Human Resource Management (SHRM), the National Council of Chain Restaurants and the National Federation of Independent Business. While critics have threatened to try to block or modify the rule in Congress or the courts, it was unclear at press time whether those efforts will succeed.  ​

In many organizations, HR professionals may find that they themselves are newly eligible for overtime. The median annual salary for HR assistants is $38,100, and three-fourths fall under $46,400, according to a May 2015 report by the Labor Department’s Bureau of Labor Statistics.

Adjusting Pay

After determining how their workforces are affected by the new rule, employers have three basic options for adjusting their compensation practices, according to the Labor Department. The options are:

For the first time, the new regulations allow employers to use nondiscretionary bonuses and incentive pay to satisfy up to 10 percent of the salary threshold, provided the incentives are made on a quarterly or more frequent basis.

Nondiscretionary bonuses or incentives are just that—not discretionary. In other words, if an employee meets his or her performance or productivity goals, “there’s no question about whether it’s going to be paid out or not,” says Meg Ferrero, assistant general counsel at ADP, a payroll and HR services firm based in Roseland, N.J.

But optional perks such as a golf club membership don’t qualify as a bonus, says Michael Eastman of NT Lakis LLP in Washington, D.C., who argued against the overtime changes on behalf of SHRM.​​​

Under the new rule, if an employee doesn’t earn enough in nondiscretionary bonuses and incentive payments in a given quarter to retain exempt status, he or she would be entitled to time-and-a-half for any overtime hours worked throughout the quarter. Employers can opt to make one “catch-up” payment to the worker at the end of the quarter to compensate for the shortfall.

​​“If employees are productive or saving money and we’re able to give them a quarterly bonus that will help toward the threshold, then we might be more eager to do that vs. increasing base pay” to maintain their exempt status, says Sally Roberts, SHRM-SCP, director of HR at Morris Communications Co., a newspaper and magazine company based in Augusta, Ga.

Recruiting Challenges

​​In deciding how to respond to the new regulations, HR professionals must also consider the impact of reclassification on benefits and recruitment.

While the federal Affordable Care Act has all but eliminated the option of varying medical benefits by hourly and salaried status, salaried workers may have more-generous vacation leave and other paid time off, says Zack Pace, senior vice president of benefits consulting at CBIZ Inc. in Columbia, Md.

Moreover, “within certain industries, including construction and retail, employer-paid group life and group disability benefits might only be offered to salaried employees,” Pace notes.​

​In terms of recruiting, HR and hiring managers may have a more difficult time luring candidates for middle management positions, says Kristi Jones, talent acquisition manager for H&R Block based in Kansas City, Mo.

‘It will be an especially hard selling point for managers—to tell people they are expected to manage a team as an hourly worker.
—Kristi Jones, H&R Block

“It will be an especially hard selling point for managers—to tell people they are expected to manage a team as an hourly worker,” Jones says. “Salaried employees receive unlimited vacation, while hourly associates must accumulate vacation. That’s a perk to being salaried.”

And the rise in management labor costs will force cuts in recruiting and entry-level hiring, says Eric Oppenheim, SHRM-SCP, executive vice president and franchisee of Republic Foods, where he manages the operations for 17 Burger King restaurants in the Washington, D.C., area. As a result, fewer workers will get promoted to management, he says.

Tracking Hours

​While the overtime rule doesn't mandate that employers use any specific method for recording work hours, it does require the records to be accurate. So simply filing the weekly work schedules with an i​ndividual’s hours listed as 9 a.m. to 5 p.m. won’t suffice, attorneys say.

“Of particular concern for employers is the risk that employees will underreport hours worked and then later present claims for alleged off-the-clock work, likely at overtime rates,” says Paul DeCamp, an attorney with Jackson Lewis in Reston, Va.

Scheduling, tracking hours and managing overtime can be especially difficult in the hospitality industry, where the volume of business can fluctuate with changes in the weather or other demands outside the employer’s control, says Michael Layman, vice president of regulatory affairs at the International Franchise Association in Washington, D.C. 

Telecommuting Reductions

​Other repercussions of the rule change may be reduced telecommuting options for newly reclassified workers and new restrictions on the time employees spend using smartphones for work purposes.

“The change from exempt to nonexempt does not require that an employer change its telecommuting arrangements,” says Denise Drake, an attorney with Polsinelli in Kansas City, Mo. “It does require a change in the employer’s policies, expectations and monitoring of the employee’s work.”

And it may necessitate a modification in a telecommuting employee’s work habits.​

​“An employee who liked to work at varying hours of the day, whenever it suited his or her schedule, may need to be limited to certain core working hours,” Drake says. Reclassified employees will need to carefully record all time worked, she notes.

Several studies have shown that employees who use smartphones tend to work longer hours, because they can often easily access company e-mail and files in the evenings and on weekends. They may need software to help them track hours, too.

HR can help managers and business leaders to set a tone indicating that people aren’t being asked to work on their off-hours, says SAP Chief Human Resources Officer Stefan Ries.

“Don’t expect employees to answer an e-mail within the next five minutes” of it being sent, he says.

For those looking for a silver lining, the new rule could provide HR professionals with the opportunity to retool job descriptions that should have been updated long ago. It may also give leaders an impetus to be more creative and resourceful about how work gets done.

“It’s a really great opportunity for HR professionals to shine,” says Sellen Construction’s Lindgren. “This is where we show our value to the business and how we solve these issues and engage our employees, but keep an eye on the bottom line and come up with lots of different solutions to the problem.” 

Illustration by Philippe Lechien for HR Magazine