By Lisa Milam-Perez, J.D. “Some people are going to get more money, some people are going to get more time, and everybody is going to get clarity,” according to Labor Secretary Tom Perez, speaking to reporters on a White House press call late Tuesday as the administration was poised to unveil its long-anticipated revisions to the FLSA “white collar” overtime rules. Which of these purported benefits, if any, will a given employee receive after the rule change takes effect December 1? In large part, that will be up to employers. The worker wins? The DOL estimates that an additional 4.2 million U.S. workers will be newly entitled to overtime protections as a result of the rule revisions, which more than double the salary threshold under which overtime pay is guaranteed. (The administration says workers will get roughly $12 billion more in higher wages over the next decade as a result.) Alternatively, workers will benefit from more time off the job if employers choose to comply by reining in employees’ work hours so they don’t work past 40 in a workweek, according to the administration. Finally, less tangibly, another 8.9 million salaried workers who fall somewhere between the old and new salary floors will have a clearer understanding of their overtime eligibility and, therefore, can better stand up for their rights under the FLSA, according to Perez. “It’s a form of insurance policy,” he said. “You’ll know that because you’re below the threshold, you can’t be asked to work overtime without pay.” Indeed, employers “retain considerable flexibility in how they comply with the new rule,” a White House statement noted. “Companies are going to be faced with a choice: Either they pay those workers overtime, or they cap their workweek at 40 hours,” Vice President Joe Biden told reporters. “Either way, the worker wins.” Not so fast, says Andrew Volin, a partner in the Denver office of Sherman & Howard, which represents employers in wage-hour litigation and other employment disputes. “A natural reaction is ‘hooray, the government just gave us a raise,’ but that might not turn out to be true,” Volin said. “Only a lucky few should expect an outright raise.” Who will be most affected? “At such a high salary level, I dare say that there are just a few employers with exempt employees that are not impacted,” said Alfred B. Robinson, Jr., a shareholder in the Washington, D.C., office of Ogletree Deakins, who formerly served as acting administrator of the DOL’s Wage and Hour Division. “The impact will be felt across many types of employers, including small and large employers, nonprofit entities, local governments, and educational institutions. “Rather than types of employers impacted,” he added, “I think there are just a few regions or metropolitan areas of the country where the new salary amount will not have a significant impact.” The largest groups of employees likely to be affected are managers, assistant managers, and supervisors in retail, restaurants, manufacturing, and healthcare, though many employees in other jobs and industries will feel the effects as well, according to Paul DeCamp, a principal in the Washington, D.C., office of Jackson Lewis, who served as DOL Wage-Hour Administrator under the Bush administration. “Employees in certain parts of the country with more modest wage levels, such as the South, the Midwest, rural areas, and Puerto Rico, will be especially hard hit,” he added. “These individuals are most likely to see their jobs reclassified to nonexempt, their hours cut, and their total pay decline steeply over the next six to eighteen months.” Compliance options. Volin set out five options for employers in contending with those currently exempt employees whose salaries will fall below the new minimum: (1) Increase their salary level to maintain the exemption (and not worry about overtime); (2) Divide their current salary by 40 hours and switch to hourly (and worry about overtime); (3) Convert them from salaried to hourly based on actual hours worked, so the net cost is the same (although, Volin notes, this option assumes the employer has reliable information about hours worked, and final pay will vary with hours worked); (4) Convert from salaried exempt to salaried nonexempt, and pay overtime for excess hours over 40 in a workweek; (5) Utilize the fluctuating workweek method: The employee’s salary covers all hours worked, including overtime (although special rules apply here—including advance notice and buy-in from employees). A downside for workers? Employers will have to find the money to pay for the higher costs ushered in by the rule change, likely by hiking prices or cutting costs elsewhere, Volin pointed out. “There is still no such thing as a free lunch.” Alternatively, employers will explore other measures to control labor costs in light of the revised overtime rules. Some may simply maintain an employee’s 40-hour-plus workweek, but lower their hourly rate so that net payroll costs stay the same. The DOL’s Perez downplayed this prospect during Tuesday’s press call. “We asked that question during our year-long outreach with employers,” he said. “I haven’t heard from one employer who said they’d lower the wage. Here’s why: These [affected workers] are their most valuable employees. These are the workers who open the store, who close the store, who hire and fire, and bring the money to the bank. These are the most trusted people in their organization. You don’t respond by lowering their salary. This is what experts would call behavioral economics: It’s inconsistent with rational behavior to lower their salary.” So, while this outcome is “theoretically correct,” Perez insisted, “in our review of the evidence we are not convinced that that will be the outcome.” Our panel disagreed. As Robinson pointed out, the final rule “discusses this option in some detail.” And the National Retail Federation, which decried the DOL’s overtime rule as “outrageous,” cited a study indicating this is precisely the strategy that employers likely will use. John Thompson, a partner in the Atlanta office of Fisher & Phillips, was equally skeptical. “I feel certain that a fair number of employers will set lower pay rates, reduce pay rates, adjust hours of work, or take other steps designed to avoid spending more on labor costs than they must,” he said. “It might be that this can never be quantified in an economy as big and diverse as the United States is, but it will happen.” Jackson Lewis’ DeCamp warned of the unintended consequences of the rule change when the proposed rule was first issued, fearing that it “will substantially reduce the pay of the very workers it purports to help” as employers adjust their hourly rate and/or hours downward in response. The final version, albeit slightly tempered from the proposal first floated last summer, did little to alter his outlook. “When employers realize that paying high hourly rates for overtime is not sustainable in the long run, many of these employees will see their schedules cut, resulting in a steep drop in pay,” he predicts. Sherman & Howard’s Volin also envisions that some workers may stay at their current salary level but face a cut in their work hours, along with a corresponding reduction in benefits and other components of their compensation. “Small companies may not have the flexibility larger ones do, and so it might be more efficient to hire two part-time workers, who do not receive benefits, rather than keeping on one salaried worker whose salary just became more expensive,” he observed. Timekeeping, and other slights. Being converted to “hourly” will come with the consequent nuisance of having to track one’s hours on a daily and weekly basis. “Exempt employees generally do not want to be nonexempt,” DeCamp said. “They don't want to punch a clock or otherwise to have to report their time on a minute-by-minute basis, including noting when they leave for and return from lunch. They don't want to lose the guaranteed income that comes from being salaried. They don't want to lose prestige or respect in the workplace. They don't want to lose access to exempt benefits.” Detractors from the new overtime provisions also note the loss in employee flexibility that comes from reclassification to nonexempt status. But the DOL sought to rebuff this notion in a Q and A document on the new rule. “The FLSA does not require workers to punch a clock,” the agency explained. “Moreover, the recordkeeping requirements of the FLSA do not limit the flexibility that an employer can afford to its workers.” Granted, employers must keep accurate records of total hours worked, but they are not required to record start and end times, only total hours worked. “Employers can continue to permit their employees to work flexible hours as long as their total hours each day are accurately recorded.” “Demotion of millions of workers.” DeCamp warned that employee morale will take a palpable hit, too, as newly nonexempt employees find themselves stripped of other perks of exempt status and the heightened stature that it affords in some workplaces. “The morale problems associated with having employees who feel that they have just been demoted will be enormous,” he said. “This will also affect issues like recruiting for these positions as well as access to skills development and career progression. The upcoming demotion of millions of workers will hurt the career and earnings trajectories of many of these individuals for the rest of their working lives.” Congressional Republicans have voiced similar concerns regarding the rule’s negative impact on professional growth. House Education and the Workforce Committee Chairman John Kline (R-MN) and Workforce Protections Subcommittee Chairman Tim Walberg (R-MI) issued a joint statement contending that, “[b]ecause of this rule, many Americans will soon realize they have fewer job prospects, less flexibility in the workplace, and less opportunity to move up the economic ladder.” Likewise, Henry G. (Hank) Jackson, president and CEO of the Society for Human Resource Management (SHRM), said the changes mean that “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.” “By dramatically increasing the wage threshold for determining a restaurant manager’s overtime eligibility, key management positions will be eliminated, restaurant employee career advancement will be derailed and workplace morale will plummet,” said Rob Green, executive director of the National Council of Chain Restaurants, in a statement opposing the new rule. “These rules are a career killer,” echoed David French, the National Retail Federation’s Senior Vice President for Government Relations. “With the stroke of a pen, the Labor Department is demoting millions of workers.” The challenges ahead. As for the employers of these newly nonexempt workers, the hurdles in implementing the rule change are numerous, as Fisher & Phillips’ Thompson notes. He cited some of the more vexing practicalities of dealing with those employees who will no longer be exempt:
- How will they be paid?
- How will the financial impact of complying be balanced against the realities of a finite amount available to devote to labor costs?
- How will the employer ensure that it is keeping accurate records of hours worked for them?
- How will it deal with the adverse employee-relations effects brought on by the status change?
- analyzing whether the requirements that employers had been relying on in classifying employees as exempt under the white collar provisions continue to be met;
- evaluating what might be changed about one or more jobs so that the incumbents may be treated as exempt in the future;
- considering whether alternative FLSA exemptions could apply; and
- developing FLSA-compliant pay plans for employees who have been treated as exempt but who no longer will be.
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