A Matter of Time: What you need to know about the new overtime rule
Big changes are coming to overtime pay for white-collar workers. A new rule from the Department of Labor, aimed at making it easier for low-wage workers to be paid for working extra hours, is set to take effect in December. The new rule, which more than doubles the salary threshold for overtime exemption, will not just impact an estimated 36,000 Utah employees, but their employers as well.
U.S. overtime laws date back to 1938, when President Roosevelt implemented the Fair Labor Standards Act. As a result, employers are required to pay their employers time-and-a-half for any time worked beyond a 40-hour workweek. However, white collar workers can be exempt from receiving overtime if they make at least $22,660 a year and perform executive, professional or administrative duties. Starting in December, that salary threshold for exempt status will be raised to $47,476.
What’s white collar?
Though the salary level for exempt status will increase at the end of the year, the duties test used for defining the different categories of white-collar worker—executive, professional, administrative—will remain the same.
To be categorized as an executive employee, workers must have a role in managing the business and regularly direct the work of two or more employees. “Executive employees usually use a significant amount of discretion and independent judgment in their job duties,” explains Bryan Benard, partner at the law firm Holland & Hart, LLP, and the firm’s practice group leader for labor and employment.
The professional exemption is reserved for workers with degrees beyond a bachelor’s who are doing work that involves advanced knowledge. Professional workers could be accountants, lawyers or even very specialized computer software developers. The professional category also includes positions deemed to be highly creative like writers or art directors.
The administrative exemption is toughest to define and is reserved for employees who have significant input or responsibility for decisions that will affect the business. “An employee who makes decisions about which vendors to use and how much to pay them would likely qualify for the administrative exemption,” Benard says. “An employee who just calls the vendor to check prices or schedule a meeting may not.”
What the change means
Nearly every industry in the state has exempt workers who will not meet the new salary threshold, Benard says. “A lot of employers have assistant managers, executive assistants, and low-to-midlevel supervisors, so the impact is likely to be felt across the board.”
Take the retail industry, for example. In today’s world, an assistant manager might make an annual salary of $25,000. Because that pay level qualifies the employee for exempt status, she can work more than 40 hours a week during a busy time without receiving overtime, and her employer has the flexibility to let her to work less than 40 hours another week for the same pay, Benard explains.
So what are employers to do with employees who are exempt today, but who will not qualify for exempt status when the new rule takes effect in December? Monica Whalen, Utah president of the Employers Council, says there are basically three options to choose from.
The first is to increase the employee’s salary to the new threshold. This can be done by simply raising the employee’s base pay to $47,476 or by providing non-discretionary bonuses that, when combined with the base salary, bring the employee’s pay to the new exempt salary level. “Employers should note that a nondiscretionary bonus can’t exceed more than 10 percent of the new salary threshold level, if it is going to be counted toward the threshold limit,” Whalen explains.
The second option is to reclassify the employee as nonexempt and pay them overtime when they work more than 40 hours in a workweek. “Employers have a choice here—these employees can either be converted to an hourly paid employee or you can keep them on a salary, as long as they are paid overtime for the extra hours they work,” Whalen says.
The third option is to move the employee from exempt to nonexempt status—and not pay them overtime. By strictly holding employees to a maximum workweek of 40 hours, employers can avoid the extra cost of the overtime. “The problem [with this approach], however, is that you still have the same amount of work to get done with an employee who you are now holding to fewer hours than they may have worked in the past,” Whalen says.
To solve this problem, she says employers can redistribute some of the those duties to other employees, make efficiency improvements or hire additional people to accomplish what the newly nonexempt employee is not able to accomplish in a 40-hour work week. “My assessment of the situation is that no matter which option you choose, it’s going to result in increased labor costs for employers,” she says.
Every minute counts
Obviously, it’s better for the budget if a company doesn’t have to pay overtime rates. But labor costs aren’t the only reason why some employers like to keep employees exempt from overtime. Often, paying a straight salary is easier than asking employees to track their hours. That also creates more flexibility for employees—they don’t have to clock in and out or time their lunch breaks—and employers don’t have to worry about the mistakes that come with logging hours or the abuse that often accompanies overtime reporting.
Whalen says the burden of accurate reporting falls on the employer, and it’s only made more difficult in an era of hyperconnectivity. “We advise employers to train those supervisors and managers who will now have newly nonexempt employees under their supervision,” Whalen says. These leaders need to understand that nonexempt employees need to track all of their time—even those minutes spent checking email or sending texts outside of the office. They also need to make sure their employees are not working through lunch or staying late without tracking that extra time.
“These are things that you didn’t need to worry about when the whole crew working under you were salaried exempt employees,” she says. “Now for thousands of Utah workers, that is no longer going to be true. The burden is going to be on those supervisors and managers to make sure they understand those new rules and are holding their employees to them.”
A big payday or a big let down?
Rod Lacey, chief people officer at 1-800 Contacts, says HR professionals have been paying close attention to the news surrounding changes to the overtime rule and many are concerned about the media message aimed at workers.
“Much of the talk in the national media has been ‘Everyone is going to get a raise. You’re finally going to be paid what you’re owed. Your employers can no longer take advantage of your work week.'”
Lacey doesn’t appreciate his company being lumped with employers who may have treated their employees unfairly. “We’re not one of those employers,” he says. “We treat our people extremely well. We don’t discourage overtime if somebody chooses to work it, and we pay those people for that overtime.”
He’s also concerned that recent media coverage gives Utah workers the wrong impression about how the rule will impact their base pay. About 3 percent of the employees at 1-800 Contacts fall into the pay band affected by the new overtime rule. The company looked at each employee in that band and made a determination about what to do next. Employees whose salaries are just below the new threshold may a receive a small salary bump in order to kept exempt status. Those who are farther from the minimum salary level will be reclassified as nonexempt.
Based on what he has heard from other HR pros, Lacey says most other Utah companies are doing the same—looking at the employees in the band and making individual assessments. “Most local employers are going to convert their people to either hourly employees or make them a salaried employee who is eligible for overtime,” he says.
While this approach seems fair for employees and smart for employers, it may create some real communication challenges. “I worry that the average employee who’s read the headlines is going to think they’re getting a big raise, and then when they get pushed back to hourly, it’s going to feel like a demotion,” Lacy says.
“When you get made salaried, it feels like you’ve arrived at a professional-level role, like you’ve advanced in the ranks from being an hourly contributor, [who is] beholden to the time clock and checking in and out every time you leave your post,” Lacy explains. “If someone is directly converted from salary to hourly, they’re going to have to hit the time clock again and that’s not going to feel very good.”
To make sure the overtime rule doesn’t lead to disappointed employees, Lacey’s team has spent months planning how to communicate the changes to its impacted workers. “It’s important to us that they know we value them and that we plan on continuing to grow and develop them, despite the new [salary threshold] parameters we have to work under now.”
Practical tips for employers
Though the new overtime rule goes into effect in December, Whalen says now is the time to get ready for the change. She recommends a few things that every employer should do to make sure they’re not only in compliance but in the best position to mitigate any employment issues.
The first step is to take a look at look at each of the jobs that fall below the new salary threshold. “It’s important to examine the actual job duties, not just the titles,” Whalen says. “Get input from managers or supervisors, confirm which jobs are exempt, and then identify which jobs will require a status change.”
Once you know which employees will be impacted by the rule change, you can calculate the cost of moving the employee to the new salary threshold versus reclassifying him or her and facing the cost of potential overtime. “Each organization is unique, so study the implications to your business and make decisions on how to best proceed for your organization,” Whalen says.
After making the business decision, it’s time to share the message with employees. “Communication is a key element of change,” Whalen says. “Be transparent in what you are planning to do, explain how and when you plan to do it, and then anticipate potential morale issues and be prepared to alleviate them.”
Employers will also need to train leaders who don’t have experience managing nonexempt workers. According to Whalen, these training sessions should cover a wide range of topics, including the importance of accurate time tracking, how to deal with unpaid meal breaks, why off-the-clock work is prohibited, when to pay for travel time and on-call time, how to handle time spent checking emails or listening to voice messages after hours, why overtime work should be approved in advance, and how to manage your time to be able to complete work within the 40-hour workweek.
For employers looking for more help, Whalen recommends visiting the Department of Labor website and looking through the fact sheets and videos about the new changes and then reaching out to your corporate attorney or third-party HR expert. Wherever you decide to turn for help, Whalen gives one last piece of advice: begin now.
“Despite the positive policy reasons behind the rule, it is creating headaches for employers with its relatively short period of time to implement changes in order to comply,” she says. “Employers who don’t educate themselves about this change, as well as all of the nuances of the Fair Labor Standards Act, are at an increased risk of vulnerability to legal challenges. It’s like being hit with a double whammy, because the Department of Labor is not only changing the rules but they’re upping the ante on the potential penalties that can be assessed if you get it wrong.”