For Linda Shemwell of defense contractor Valdez Enterprises, the proposed overtime regulations from the Department of Labor could mean completely changing the way she does business.
The new rules involve who is classified as an exempt employee — those workers who can work more than 40 hours a week without overtime pay. Last updated in 2014, the wage threshold for exempt workers is currently set at $23,655, below the poverty level. The proposed update brings that to $50,440 a year.
“I think we’ll have to take a look at how we’re keeping track of time, who we have as a non-exempt employee, trying to make sure people are in the right category and their job description is correct,” she said. “It’s going to be a lot of extra work.”
But it could equal more than just a temporary headache — the proposed regulations could change the way Valdez bids for contracts if they are required to pay more people overtime for the work they do. In fact, she speculates the changes could make the government use more public employees, since they fall under a different set of wage regulations.
“We’re already seeing that,” she said. “Instead of using contractors, they’re hiring more people as government workers or in some cases, using soldiers who are close to retirement to fill the gaps.”
Dealing with the upcoming changes to the minimum wage and overtime laws was the topic of a meeting Tuesday morning sponsored by the Mountain States Employers Council, the Colorado Springs Small Business Development Center and the Colorado Springs Regional Business Alliance.
About 75 people — Shemwell among them — filled a banquet room at the Hotel Eleganté to learn more about the proposed changes and how to prepare for them.
As Michelle Jacobsen, director of the Mountain States Employers Council and an expert in employment law, discussed the regulations — from conducting employee audits to switching employees to non-exempt status, the mood grew increasingly gloomier.
“What if we just don’t do it?” one woman asked. “What if we decide increasing people’s salaries to that level is impossible, and we just don’t provide overtime? What happens then? What if we just take the chance with the lawsuits?”
By the numbers:
$50,440 – new threshold for overtime exempt employees
2.1 million – restaurant and retail workers affected
3.5 million – other workers affected
32 percent – workers switched from exempt to non-exempt
21 percent – could earn as much as $11,600 in overtime pay if no changes occur in hours worked.
117,100 – part-time workers hired to meet company needs
(Source: National Retail Federation)
Jacobsen explained: The Department of Labor has invested heavily in its investigative branch, which now stands at 250 employees. When they receive complaints that employees are being incorrectly paid, those are the people who investigate. And companies won’t just pay back wages — they’ll have to pay overtime, legal fees and fines.
“And if the DOL believes you flagrantly disregarded the rules, they can double those fines,” she said.
It’s clear that the department isn’t going to change its mind and keep the threshold at slightly more than $23,000.
“President Obama talked about this since he got elected,” she said. “It’s part of his legacy. I expect that the final rules will be made sooner rather than later.”
That could mean as early as March. The DOL is currently seeking comments about the regulations; the comment period ends Sept. 4. Then they will gather the data, make any changes and issue final rules.
It all adds up: More people will be eligible for overtime pay, to the tune of about 5.7 million people nationwide.
“Bottom line: There will be more people getting overtime pay,” she said.
The National Retail Federation, an industry group, estimates the new rules will cost employers $9.5 billion in added payroll costs, but believes many companies will limit hours or reduce base pay. In addition, a study shows that the new rules will force hidden costs for web-based and other payroll systems to track employee hours and other administrative expenses that are estimated at $745 million, even if hours were cut so workers don’t have additional take-home pay.
The NRF is one of the trade organizations asking for more time to study the proposal, but Jacobsen says she doesn’t think the government will procrastinate.
“I don’t think they’ll wait until summer,” she said. “They have to give employers 60 days to implement the changes, and if there is a new administration, they could roll back the changes. If we have nine months or more, then we’ll have all adapted.”
The 98 pages of proposed rules include more than just raising the limit for exempt employees. They’re far more complicated. They also include a requirement to factor bonuses into the wage range and pay overtime wage — 1.5 times an hourly rate — at that level. Flex time can be used, but only in the same week. And only public employees can take advantage of “compensation time,” time off instead of overtime pay.
“There are two tests for exempt employees,” Jacobsen said. “And the DOL is only looking at the salary test. The other is duties. Some employees: executive, administrative, computer professionals, learned professionals and outside sales people are exempt based on their job description, but they must also meet the salary baseline.”
The update of the salary base is going to make the changes expensive, said some in the audience.
“How do you increase salaries by that much?” one business owner asked.
“You can’t do that with teachers — there’s not enough tax money to pay them.”
School districts will have to come up with other ways to compensate teachers, Jacobsen said, unless the DOL excludes them from the wage and overtime regulations, as it has in the past. Or, if school districs allow them to take time off to compensate for their overtime hours.
Employers should start preparing for the changes now, instead of waiting for the final rules. But there’s one thing that should top the list.
“Don’t panic,” she said.
Second, business owners, trade associations and industry groups should take advantage of the comment period and answer the questions thoughtfully and completely.
“Looking at the questions, you can see where they’re going to look next,” Jacobsen said. “They’re not issuing these rules and quitting. That’s not the way it works. These comments show they are looking at the duties side of the regulations next.”
The questions range from “What changes, if any, should be made to the duties test?” to “Should the DOL use percentages of work performed to maintain exempt status or is there a better way to do this?”
Businesses should also develop a strategy to plan for the additional costs, she said. That should include putting one person in charge of the company’s process: conducting work audits, figuring out job descriptions and determining who’s moving from exempt to non-exempt status.
“Employees aren’t going to like it,” she said.
“There’s a certain status to working for a salary instead of by the hour. And there’s a certain status to not having to track hours. Communication is going to be the key.”
As employers are determining salaries, they should factor in the amount of overtime they expect an employee to work.
“Don’t just divide the salary to come up with an hourly wage,” she said. “You can do that, but it’s perfectly legitimate to lower the salary to cover the expectation of overtime.
“If you do that, of course, be prepared to communicate it — and why you’re doing it — because it will seem like you’re dropping their pay.”
Be prepared, Jacobsen says, for questions and for litigation.
“There’s always an increase in lawsuits and complaints after these rules are implemented,” she said. “People wonder if they were always eligible for overtime.”
Other things to take into consideration: Will this affect the organization culturally? How do employers address the digital age — where people can check email online at any time of the day? Do companies lose flexibility with their workforce?
“It can seem daunting,” she said. “Butdon’t wait until the final rules to act. That won’t give you enough time.” n CSBJ