Today, the Partnership to Protect Workplace Opportunity released a new video featuring the voices of non-profits, higher education, small businesses, and employees who would be adversely affected by the Department of Labor’s proposed rule change for overtime.
Watch the video below:
Today, 139 national organizations and 201 regional, state, and local organizations joined letters urging Members of Congress to support legislation that would require the Labor Department to conduct a detailed economic analysis before making dramatic changes to federal overtime pay requirements. The letters, which were spearheaded by the Partnership to Protect Workplace Opportunity (PPWO), ask members of congress to cosponsor S. 2707/ H.R. 4773, the Protecting Workplace Advancement and Opportunity Act. The legislation would require that the department conduct a comprehensive analysis of the impact on career development and workplace flexibility and on small businesses, nonprofits, and local governments before moving forward with its proposed changes. The letters are supported and co-signed by representatives of nonprofits, institutions of higher education, schools, cities and counties and small and large businesses across the country, all of which are concerned about the unintentional damage DOL’s proposal would cause to workers, employers, and the U.S. economy.
“Labor Department’s proposal would not only result in an estimated cost of $8.4 billion per year, but will reduce opportunity and flexibility for millions of executive, professional, and administrative employees—particularly those at the beginning of their career. Statements by DOL officials suggest the Department plans to ignore the tens of thousands of comments asking it to reconsider the proposal. As a result, Congress must act and force the department to examine more closely the impact of the drastic and immediate increase and consider less harmful alternatives,” said Lisa Horn, a spokeswoman for the Partnership to Protect Workplace Opportunity (PPWO).
At a Senate labor appropriations subcommittee hearing, Sen. Alexander asked Labor Dept. Secretary Thomas Perez about the department’s proposed overtime rule. Quoting a letter from a group of independent colleges in Tennessee, Alexander said, “One of our members calculated that the first year impact would translate to a $1,000 per student increase in tuition … It’s expected that the change will cost each four-year campus a minimum of $1. 3 million. Another rural campus noted the change would impact 133 employees for a total of 3.2 million dollars.”
Alexander, who chairs the Senate’s labor committee, then asked Perez that at a time when the administration talks about keeping “college costs down, how can you justify an overtime rule that might raise the cost of college by $1,000 per student?”
The Partnership sent a letter to Congress, urging members to contact the administration and encourage them to reconsider their overtime proposal due to its serious consequences for employees and businesses across the country.
Click here to read the letter.
Eric Williams, COO of CKE Restaurants, discussed his experience attaining the American dream by seizing opportunity in the workplace when testifying before a House Education and Workforce hearing on “Examining the Costs and Consequences of the Administration’s Overtime Proposal.” (Written testimony here.)
Elizabeth S. Hayes of the Society for Human Resource Management testified before the committee on the threat to opportunity posed by the Department of Labor’s proposed rule. (Written testimony here.)
Former administrator of the wage and hour division at the U. S. Department of Labor Tammy McCutchen testified on behalf of the U.S. Chamber of Commerce. (Written testimony here.)
By Allen Smith
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.”
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.”
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.
Small Business Administration
Office of Advocacy
Regional Roundtable on
DOL’s Overtime Regulations
Thursday, July 16, 2015, 2:00–4:00PM (EST)
Room: Bluegrass I-II
280 West Jefferson
Louisville, Kentucky 40202
Dear Small Business Representatives:
The Office of Advocacy of the Small Business Administration invites you to a Small Business Regional Roundtable to discuss the Department of Labor’s Overtime Regulations. On June 30, 2015, the Department of Labor’s Wage and Hour Division released a proposed rule that revises the overtime regulations under the Fair Labor Standards Act, specifically the “white collar” exemption from overtime pay for executive, administrative and professional employees. Public comments are due to DOL on Sept. 6, 2015 (approximate date).
Some details of the proposed rule by DOL are as follows:
Mary Ziegler, Director, Division of Regulations, Legislation and Interpretation, from the Department of Labor will provide a brief description of this new regulation. In addition, SBA representatives have also been invited to discuss their programs.
Please note that during the roundtable we will not be seeking any collective consensus on these issues and that comments made during this roundtable will not be considered official comments in this rulemaking process. However, Advocacy is seeking feedback from you on the number and types of small businesses likely to be affected by this rulemaking, the compliance costs of this rule to these small businesses, and any significant regulatory alternatives that may minimize the impacts of this rule.
For more information on the proposed rule:
Advocacy is an independent voice for small business within the federal government, the watchdog for the Regulatory Flexibility Act (RFA) and the source of small business statistics. Advocacy advances the views and concerns of small business before Congress, the White House, the federal agencies, the federal courts and state policy makers. Advocacy takes its direction from small businesses and hosts roundtables to receive input on what areas are of greatest importance. Roundtable meetings are open to all interested persons, with the exception of the press, in order to facilitate an open and frank discussion about small business-related issues. Agendas and presentations are available to all, including the press. Anyone who would like to receive roundtable agendas or presentations, or be included in the regular distribution, should forward such requests to firstname.lastname@example.org. The purpose of these roundtable meetings is to exchange opinions, facts, and information and to obtain the attendees’ individual views and opinions regarding small business concerns. The meetings are not intended to communicate or achieve any consensus positions of the attendees.
On June 30, 2015, the U.S. Department of Labor released its long-awaited proposed rules making some drastic changes to the way overtime exemptions are applied under the Fair Labor Standards Act. Under rules last updated in 2004, a worker earning at least $455 per week ($23,660 annualized salary) is exempt from federal overtime requirements assuming the worker meets the “duties” component of a particular exemption such as the executive, administrative, or professional exemption. The proposed rule more than doubles that minimum salary to $921 per week ($47,892 annualized salary).
On the surface, this adjustment seems like a boon for American workers. It is being reported that this new rule would make an additional 5 million workers eligible for overtime pay. And, the administration is selling the new rule as a way to put more money in workers’ pockets and to ensure that the economic pie is more equitably shared between labor and management. Labor Secretary Tom Perez is even calling the new rule a $1.5 billion raise for American workers! Ironically, however, while the rule would make more employees eligible for overtime pay, it might result in workers being worse off than before.
Other than requiring the payment of the minimum wage, federal (or for that matter state) law does not regulate the wage rate employers must pay employees. That rate, instead, is set by the parties’ agreement. While that agreement could be enshrined in a written contract, for most workers their wage rate is set by the employer announcing what the rate will be. Absent a contract, the rate can be changed at anytime — up or down. Just as it is not unlawful for an employer to raise a worker’s salary — it is equally lawful for an employer to reduce a worker’s salary.
Thus, to comply with the new overtime rule an employer would have a number of options. It could, of course, raise workers’ wages to meet the new minimum salary to maintain the overtime exemption. Alternatively, it could leave workers’ salaries where they are and pay overtime premiums for hours worked over forty in a workweek. Both of those reactions would benefit employees with higher take-home pay or at minimum more hours of leisure time at the same salary. What a deal! With the mere wave of the administrative wand, workers will earn more money and have more free time. It sounds almost too good to be true. And it is. Employers need not react to the new rule with such generosity. Instead, employers could react in at least two ways that would leave workers worse off than before the new rules.
First, an employer could simply reduce an employee’s salary such that when the overtime premium is paid the worker makes the same as before. For example, imagine a store manager who is paid a $500 weekly salary and who regularly works 50 hours a week, 10 hours of which considered overtime hours. Under the new rules, that manager would be entitled to overtime and would, if the employer did not adjust salary, earn an additional $50 per week. Magic! But, not so fast. By reducing the manager’s salary to $450 per week, the manager under the new rules earns only $495 per week after overtime is calculated.
Thus, the employer pays no more, the manager earns no more, and the manager works no less. That of course assumes that the manager worked at least 10 hours of overtime. If she did not, she would not be entitled to overtime and would actually earn less because coming up to her former salary now requires that she works 10 hours of overtime.
Second, an employer could comply with the new rule by converting salaried workers to hourly workers. Let’s revisit our store manager. Prior to the rule change, she was effectively earning $10 per hour ($500 per week for 50 hours worked). By converting her to an hourly employee and setting her hourly rate at $9.10 per hour, the employer would pay $500.50 for the same 50 hours of work. Never mind the $.50 in additional pretax weekly earning, our manager would be in a much worse position. As an hourly worker, she would now be punching a time clock and only be paid for hours she actually clocked. If she had to leave to run an errand or to pick a sick child up from school early, she would not be paid for that time. Not only that, she would lose the status usually associated with salaried work, as opposed to hourly work.
Thus, this new rule would incentivize employers to take away the flexibility, stability, and notability that come from earning a guaranteed weekly salary and to replace it with the uncertainty of an hourly wage. And, that trade off could come with little or no additional take home pay for the employee.
But don’t just take my word for it. The Department of Labor’s own Notice of Proposed Rule Making explains how this is a real possibility for some workers. While certainly not every employer will be inclined to react this way out of either loyalty to her employees or inability because of a tight labor market, many employers focused on maintaining profits will react this way and there would be nothing unlawful about it.
No one doubts the nobility of President Obama and his Department of Labor’s attempt to help American workers provide for their families. On the surface, this proposed rule looks like it requires employers to share more of the economic pie with their workers. That is certainly how it is being sold today. But, what is being billed as great deal for working Americans may turn out to be something much less. As if often the case, there is no such thing as a free lunch (or slice of the pie).
Mr. Mastrosimone is an Associate Professor of Law at Washburn University School of Law in Topeka, Kansas, which was recently ranked number 24 in the nation for full-time attorney job placement.. He teaches labor law, employment law, and legal research and writing in Washburn’s often nationally ranked legal research and writing program. Prior to teaching, he was the Chief Legal Counsel for the Kansas Human Rights Commission, legal counsel at the National Labor Relations Board, and represented management in labor and employment disputes at two national law firms.
Authored by Alex Passantino
Today, the U.S. Department of Labor’s Wage & Hour Division announced its long-awaited proposal to amend 29 CFR Part 541, the “white collar” exemption for executive, administrative, and professional employees. Somewhat surprisingly, the Division only made specific proposals with respect to the salary levels required for the exemption and the highly-compensated exemption. In 2016, which is when the salary increase would be expected, the standard salary is projected to be $970 per week or $50,440 per year, indexed to the 40th percentile of weekly earnings for full-time salaried workers; the highly-compensated employee standard would be set at $122,148, indexed to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers. Given the size of the increase, even California and New York employers will need to be more alert to federal wage and hour compliance.
As has always been the case, the proposed salary levels would not apply to individuals employed as outside sales employees. Similarly, lawyers, doctors, and teachers are excluded from the proposed salary requirements.
The effort to amend these regulations began over a year ago, when President Obama directed Secretary of Labor Perez to consider whether revisions to the regulations were appropriate. The proposed rule has been under review at the White House’s Office of Information and Regulatory Affairs since May 5, 2015, and President Obama is expected to discuss the proposal at an event scheduled for this Thursday, July 2, in Wisconsin. We expect publication in the Federal Register shortly. Employers (and the entire regulated community) will have 60 days to provide their comments on the proposal.
Since last year, there has been rampant speculation about what the proposed rule would—and would not—contain. At long last, we now know. An increase to the standard salary test, indexed to the 40th percentile of weekly earnings for full-time salaried workers, and an increase to the highly-compensated employee salary, indexed to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers. In other words, the rule proposes to perpetually increase the salary levels required on an annual basis.
What the rule does not contain is any specific proposal with respect to duties. Instead, WHD asks for comments on the following questions:
WHD also asks whether there are specific occupations for which it should provide additional examples in the regulatory language. In addition, WHD asks whether (and how) nondiscretionary bonuses might be used to satisfy the standard salary level.
WHD’s decision to use questions to address the duties test is somewhat unique for an Notice of Proposed Rulemaking. Presumably, WHD will use responses to the questions to formulate its positions in a final rule, which deprives the regulated community of any ability to meaningfully comment on a proposal—it’s a moving target.
Despite the fairly limited scope of the rulemaking, it is important to note that the salary levels are proposals. In 2003, when the Department last proposed revisions to the white-collar exemptions, the Department received 75,280 comments during the 90-day comment period. We can expect similar participation this time around. All of the comments will need to be reviewed by the Department, and issues raised by the comments will need to be considered and addressed. As a result, the final regulations may be different from the proposal in any number of respects. Moreover, given the scope of the proposal and the anticipated volume of comments, it is highly unlikely that the Department will be able to get a final rule completed in less than a year. In all probability, compliance with any ultimate revisions to the regulations will not be necessary until summer or fall of 2016.
What the Proposed Regulatory Revisions Mean for Employers
The current minimum salary level of $455 per week translates to $23,660 per year. This level was established in 2004, and represented a significant increase from the $155 per week ($8,060 per year) minimum that had been the standard for the preceding 30 years.
Just over 10 years removed from the last salary increase, the proposed rule expects to set a new threshold of $970 per week ($50,440 per year) in 2016. Initial estimates indicate that a salary increase to $50,400 per year would impact 5-10 million workers, many of whom are concentrated in the retail and hospitality industries. Some other estimates believe the number of impacted employees is more likely to be in the range of 15 million. Although the impact of this salary increase will almost certainly have a larger impact in Southern states and rural areas than it would in the Northeast and metropolitan areas, because the new salary minimum exceeds the California requirement of $37,440, even California employers will need to pay close attention to the federal exemption requirements.
Notably, this sizeable increase in the salary level makes it difficult to maintain part-time exempt positions. Under the current salary requirement, a part-time, pro-rated salary is sufficient to establish the exemption (provided that the pro-rated amount exceeds $455 per week). The new amount makes such an arrangement far more difficult, effectively eliminating some flexible workplace arrangements. If an employee’s pro-rated salary is not in excess of the new salary amount, that employee now needs to meticulously record his working hours, even if he never approaches 40 hours, because the FLSA’s “hours worked” recordkeeping obligations apply to all non-exempt employees.
In addition, WHD proposes to increase the highly-compensated employee standard. By its calculations, that figure is $122,148 for 2015. Neither the proposal nor WHD’s talking points indicate how much the salary would be in 2016 based on the proposed indexing.
Of course, the proposed salary is not necessarily the salary that will be required in the final regulation. In 2004, for example, the proposed salary was $30 per week lower than the salary in the final rule; the standard for highly compensated employees increased from $65,000 in the proposed rule to $100,000 in the final.
Notably, for the first time ever, the salary tests will include an automatic, annual increase, with the standard salary indexed to the 40th percentile of weekly earnings for full-time salaried workers, and the highly-compensated employee salary indexed to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers.
Clearly, the salary revisions that have been proposed will make a significant impact on an employer’s operations. Employers should now consider the impacts this proposal might have on their operations—and their bottom line. Although the salary levels will be the focus, employers should not forget about the questions posed by WHD—input is critical on these points as well. The public comment period is 60 days, and a robust regulatory record will allow the Department to best analyze the impacts its proposal will have on the economy. Thus, employers should seriously consider providing comments in response to the proposal. Seyfarth attorneys are already working with clients to do so and will be submitting comments on behalf of the firm.
Beyond the importance of providing comments, it will be necessary to begin preparing company executives and operations employees for these proposed changes. In just over a year, the proposed changes almost certainly will become final, in what we expect will largely be the same form as the proposal. The final changes are unlikely to provide a significant period of time to come into compliance—in 2004, employers only had 120 days to do so; we expect a shorter lead time next year.
With the expected lack of lead time, employers will need to start planning well in advance. For example, it will be necessary to budget for salary increases and/or increased overtime costs for at least part of 2016. In order to make informed decisions with respect to budgeting, employers will need to complete a preliminary assessment of the positions that may be impacted by the changes, and determine whether the duties performed by the positions would qualify for the exemption. Only then can the employer consider whether a salary increase is even an option.