The U.S. Department of Labor’s new overtime wage rule will take effect in December. The law will expand eligibility for overtime pay to workers making less than $47,476 a year.
The U.S. Department of Labor’s new overtime wage rule will take effect in December. The law will expand eligibility for overtime pay to workers making less than $47,476 a year.

Supporters say it offers a reprieve from stagnant wages and an overburdened workforce. Best intentions aside, detractors believe the new overtime wage law is anti-business.

Either way, businesses have to prepare to meet the U.S. Department of Labor’s Dec. 1 deadline that increases salary limits that exempt employees from overtime wages.

What’s happening?

The new law expands eligibility for time-and-a-half overtime pay, previously limited to those making an annual salary of less than $23,600. Under the new law, those making less than $47,476 a year will be eligible for time-and-a-half pay for working more hours than a normal 40-hour week, beginning in December.

In 2014, President Obama directed the Department of Labor to modernize regulations regarding exemptions for executive, administrative and professional employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act.

The department published a notice of proposed rulemaking in July 2015.

Last month, the DoL published its final rules and updated regulations and gave a deadline for businesses to comply.

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The final rule focused on updating salary and compensation levels needed for executive, administrative and professional workers to be exempt. According to the  Labor Department, the final rule:

• Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, currently the South, which is $913 per week or $47,476 annually for a full-year worker;

• Sets the total annual compensation requirement for highly compensated employees subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004; and

• Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

What does it mean?

Cathy Ruckelshaus, general counsel and program director at the National Employment Law Project, a work access and low-wage worker advocacy group, said the law equates to a much-needed raise for many workers who “have fallen into white-collar exemptions really intended to exempt higher-level professionals.”

For instance, a restaurant manager making a salary in the low $40,000s or an assistant retail manager working 50 or 60 hours a week with very few managerial duties and a similarly low salary often fall into these categories and should be properly compensated, she said.

“The rules have become so outdated that lots of workers are making very little money but falling into these professional exemptions,” Ruckelshaus said.

One criticism of the law is that workers’ hours may be cut and, instead of a single person working 50 hours a week, an employer will hire two people and split those hours in order to avoid accruing overtime costs.

“One of the purposes of this rule is it’s supposed to spread employment and not overwork one worker,” Ruckelshaus said. “If you’re making $35,000 and you’re an assistant manager working 60 hours a week, that’s not a good job. It’s not much money and really long hours.”

Another argument against the rule has been that it will remove incentives for lower-level, hourly workers who see a salary as an indication of upward mobility within a company.

In that case, employers can choose to raise those managerial salaries above the $47,476 exemption level and allow the worker to continue to work the same number of hours, Ruckelshaus said.

“If their salary is already close to $47,000, the employer may bump them up,” she said.

Ruckelshaus said employers can implement these new rules with little impact to their bottom line by dispersing hours and attentive scheduling.

“It’s in the hands of the companies to decide how to manage their payroll and not overwork workers,” she said.

Not so fast

While Ruckelshaus and the NELP have put their support behind the new law, several prominent organizations have taken a stand against it, including the National Federation of Independent Business and the National Retail Federation.

The NFIB states the new labor department rule doubles the previous overtime salary threshold, which is estimated to affect 44 percent of small businesses.

“The DoL has said it could affect [more than] 10 million employees,” said the NFIB website. “The rule could force many business owners to reclassify salaried employees to hourly positions — resulting in a loss in flexibility, bonuses and promotion opportunities.”

Monitoring timecards will “be a burden for businesses that depend on managers and supervisors to work when needed in exchange for flexibility and other benefits,” the NFIB said, adding that “worker morale will likely decline as a result of this rule. NFIB anticipates the changes will especially hit low- to mid-level managers. These managers may currently make less than the $47,476 proposed threshold, but enjoy perks such as flexibility of hours and benefits like health insurance … fewer salaried, managerial positions … [employees view] little opportunity for growth at the company.”

The retail federation was more direct.

“[The DoL has] failed to acknowledge reality,” according to its website. “Under current regulations, most workers making up to $455 a week ($23,660 a year) automatically receive overtime when working more than 40 hours a week.

“Rather than raising the level by a responsible amount, DoL has more than doubled the threshold to $47,467 beginning later this year, with an update every three years.

“That level and the fuzzy math used to get there are a bad deal for retailers and retail employees alike.”

The retail industry group says “bad math equals bad regulations” and that the Labor Department “has exaggerated the benefits and woefully underestimated the sweeping negatives associated with the new rules.

“According to the Obama Administration’s own Small Business Administration, DoL’s impact analysis was deficient, lacking in transparency and based on hypothetical data.The Florida Department of Economic Opportunity also hammered DoL’s economy-wide cost estimate of $2 billion per year, saying the cost to Florida businesses alone would be $1.7 billion per year, a whopping 80 percent of DOL’s overall number. Yet another estimate pegged the nationwide cost at $37 billion in the first year.”

The national retail group surveyed retailers and found half their current salaried workforce would be reclassified as hourly because of the regulation.

“The rules amount to a bait and switch — an empty promise of higher wages for millions of demotions,” according to the federation.

‘No question’

“There’s no question this is anti-business,” said Andrew Volin, an attorney with Sherman & Howard in Denver. “It’s going to create more complexity for payroll administrations and more risk for litigation in the employment arena.

“It will increase the costs for insurance to cover those claims, and the government’s primary objective to give people a raise will be met with frustration and more general discontent for the its ability to serve the people.”

Wage lawsuits have increased more than 400 percent since 2000 because successful employee collective action suits pay double damages and attorney’s fees, Volin said.

“We should be wary of the unintended consequences,” he said, adding the retail industry is already struggling to keep pace with internet competition.

“People have to be there to serve customers and now the cost to provide those services will go up. It adds to the asymmetry of brick-and-mortar versus the internet,” he said.

‘Some good and bad’

Benjamin Hase, staff attorney with the Mountain States Employers Council, says reality resides somewhere in the middle.

“Through conversations with our members, we’re seeing some good and bad,” Hase said. “Some are saying the rules are not too arduous and they may bump salaries a little. Some are thinking of switching to hourly anyway.

“Some are saying this will cause problems and change how they do business because they can’t rely on their hardworking mangers putting in 60 or 70 hours a week and will have to find other good people or pay more.”

Because of the precise timekeeping records that must be kept, he said, larger organizations with a multitude of employees will likely have the most difficult time adjusting.

“If they get it wrong, it has class action written all over it,” he said. “I anticipate a lot of trial and error.”

Organizations with already implemented hourly payroll systems should have a leg up, because they will only have to add additional, eligible employees, he said.

Hase said that any additional costs to the employer because of the rule could mean an increase in the costs of goods and services.

“One option for those affected by the new rule would be to increase their prices. If you can’t control your labor costs and you want to stay in business, you have to make it up somewhere.”

But even if the new rules prove to be disastrous for business, it’s very unlikely to be repealed, Hase said.

“It still has to pass congressional muster, but it should, the way it’s set up politically,” he said.

Volin agreed.

“Congress gave the Department of Labor the ability to announce salary limits,” he said. “Congress can’t do anything unless it amends the Fair Labor Standards Act.”

Ultimately, Hase said, employers will need to be more involved with scheduling to make sure labor costs are kept under control.

“I think there is the potential for this rule to bring good things,” he said. “Will it increase the cost for some businesses? Absolutely. Adding more people to your pool of hourly workers and having to keep accurate records of every meal and break — there are more chances something could go wrong.

“But from a softer perspective, it’s possible employees will be motivated to work overtime, if the employer allows it. And it might encourage some employers to bump up salaries. There’s some good and some bad.”