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Companies prep for overhaul of overtime rule

Human Resources
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Business owners are scrambling to figure out how to deal with new overtime rules that will soon affect millions more salaried workers.

The updated regulation more than doubles the threshold at which certain white-collar, salaried employees are exempt from overtime pay. The new rule means that salaried employees making less than $47,476 a year, or $913 a week, must be paid overtime as of Dec. 1.

Previously, salaried employees making less than $23,660 annually, or $455 a week, were due overtime for working more than 40 hours.

The U.S. Department of Labor and President Barack Obama said an update was needed to account for changes in cost of living.

 “It doesn’t matter if you’re working 50 or 60 or 70 hours a week — your employer doesn’t have to pay you a single extra dime. And I think that’s wrong. ... If you’re working hard, you’re barely making ends meet, you should be paid overtime. Period,” Obama said when announcing the plan in 2014.

The new overtime rule significantly increases the number of salaried workers who qualify for time-and-a-half pay. Nationally, the rule affects an estimated 4.2 million workers. In South Carolina, around 67,000 workers will be affected, according to Labor Department data.

The Labor Department released the final plan in May — giving business owners seven months to ready for compliance. That means millions of employees who do not earn salaries above the new threshold will have to track their hours come Dec. 1.

“A salary (threshold) increase is welcome. It absolutely benefits employees and employers, but more than doubling the salary number is dramatic,” said Heather Pierce, managing principal at Green Door Co., a human resources and consulting firm in Charleston. “Perhaps incremental changes would have been better. This really packs a punch.”

Decision time

Companies with employees making less than $47,476 and working more than 40 hours a week will have to decide whether to:

  • Raise employees’ salaries so they can continue working more than 40 hours a week without overtime pay.
  • Scale employees’ hours back to 40 hours a week or less to avoid overtime.
  • Keep employees’ salaries the same and pay overtime as needed.

Many companies cannot afford a blanket, simultaneous salary increase for much or all of their workforce. Scaling back employees’ hours would prevent payroll increases — but fewer hours worked can mean reduced productivity.

Sharon Sellers, president of SLS Consulting, a human resources firm based in Santee, said this option could also slow the career track of employees who rely on long hours to learn a craft or be creative in their jobs — chefs, computer programmers, writers, graphic designers or advertising creatives, for example — making it difficult for them to advance.

“I’m concerned about the haves and the have-nots,” Sellers said. “Those employees limited by hours are not going to be able to have as much opportunity to be noticed or to excel. They will no longer have the flexibility to work longer or go to after-hours events if they have to halt work after 40 hours.”

Companies could cut employees’ base salaries and make up the difference with overtime, or they might split work among several employees to stay within the 40-hour limits.

Such options could hurt worker morale, Sellers said. Employees typically prefer earning a salary to an hourly wage in an office setting, and many would not want their salaries reduced or job responsibilities changed, she said.

‘Very much a challenge’

Pierce said small to midsize businesses will feel the changes more directly than larger corporations because their employees typically do multiple jobs and have flexibility in their schedules.

Smaller businesses that do not offer big salaries sometimes compensate with flexibility — allowing employees to take time off for a doctor’s appointment, work remotely or leave early one day after working a late night, according to several business owners and HR professionals.

“This rule has such a dramatic impact on that,” Pierce said. “If an employer can’t pay a salary at that threshold, it all comes down to hours. It becomes so much more about keeping time sheets than getting the job done.”

Nonprofits will have a particularly difficult time raising salaries for all employees, Sellers said; so those organizations might be forced to scale back employees’ hours, which could take away from the nonprofit’s mission.

Stacey Denaux, CEO of Charleston’s One80 Place homeless shelter, said her nonprofit will have to dedicate more money and time to analyzing each position to ensure compliance.

“The new rule is very much a challenge with no benefit to the organization. ... One80 Place pays competitive wages compared to most employers, including for-profit companies, in the Charleston area,” Denaux said in an email. “Of our 82 employees, 21 positions fall below the new threshold. Even with those numbers, compliance will take resources away from our core mission of ending homelessness.”

Denaux said she has not decided how she will implement the new regulations. She said that the nonprofit is studying its options, but that she is doubtful she can raise base salaries for all 21 employees who are below the threshold.

Using volunteers to take over the unfinished work is also not an option. The Department of Labor views volunteers who perform duties normally performed by staff as employees, meaning wage and overtime rules would apply.

Sellers said she also expects some firms in Charleston’s tech sector to feel strain, particularly newer startups working to grow their workforce or those relying on entry-level programmers.

“IT companies have their own special flavor and culture. Many times, developers will work on projects around the clock and take off several days to recuperate,” Sellers said. “This is going to affect the culture of organizations if they have employees that are non-exempt. They are now really going to have to monitor the hours that they work if they are below the salary threshold."


Highlights of new overtime law

What is the new overtime pay law?

The new overtime rule significantly increases the number of salaried workers who qualify for time-and-a-half pay for any hours worked over 40-hour workweeks. Salaried employees making less than $47,476 a year, or $913 a week, must be paid overtime under the new law. Previously, salaried workers making less than $23,660 annually, or $455 a week, qualified for overtime pay. This is a 101% jump for the salary threshold.

When does the law go into effect?

Pending any congressional action, it will go into effect Dec. 1. A bill has been introduced in the U.S. House and Senate that, if approved, would nullify the proposed rule, require the Labor Department to conduct a comprehensive economic analysis on the impact of mandatory overtime on businesses and prohibit automatic increases to the salary threshold.

Who is affected by the new overtime pay law?

An estimated 4.2 million salaried workers in the U.S. will be affected by the rule. This new law applies to executive, administrative and professional workers, as well as managers — regardless of job title, description or managerial status. If an employee makes less than the $47,476 threshold and is covered by the Fair Labor and Standards Act, overtime pay is guaranteed.

Are there some employees exempt from overtime?

Yes. Some employees, if they meet both the salary threshold and other job duties’ requirements, are exempt from overtime. Neither job title nor salary alone determines exempt status. These roles tend to be executive, administrative, professional, outside sales or computer jobs.

The Labor Department said millions of salaried employees do not qualify for such exemptions.

How will this affect employers and employees?

Companies with employees making less than the $47,476 threshold and working more than 40 hours a week have several options:

  • Give those employees a raise to meet or exceed the $47,476 threshold so they can continue working more than 40 hours a week without overtime pay.
  • Scale back those employees’ hours to 40 hours a week only and pay them their current salary.
  • Keep those employees’ salaries the same and do not limit their hours; rather, pay them time-and-a-half for hours worked beyond 40 in a week.
  • Cut the base salaries of those who typically work more than 40 hours in a week (provided that the employee still earns at least minimum wage), with the expectation that overtime pay will make up the difference.
  • Change the pay structure for employees making less than the new salary threshold by converting them to an hourly rate, and then paying overtime as needed.
  • Some combination of the above.
Why does this law focus on salaried employees rather than hourly?

Most hourly employees already qualify for overtime pay, so this new law focuses on salaried employees. The idea behind increasing the salary threshold to qualify for overtime was that many salaried workers work well beyond 40 hours a week without being compensated for their overtime, according to the Labor Department and Obama.

What are the penalties for employers who do not comply with new OT rules?

Employers in violation of the law may be responsible for paying any back wages owed to their employees, as well as additional amounts in liquidated damages, civil money penalties and/or attorney fees.

“When Wage and Hour Division investigators encounter violations, they recommend changes in employment practices to bring the employer into compliance, and they request the payment of any back wages due to employees,” the department’s website said. “Willful violators may be prosecuted criminally and fined up to $10,000. A second conviction may result in imprisonment. Employers who willfully or repeatedly violate the minimum wage or overtime pay requirements are subject to civil money penalties of up to $1,100 per violation.”

What prompted the changes to the overtime law?

In March 2014, President Barack Obama signed a presidential memorandum directing the Department of Labor to update the Fair Labor Standards Act’s salary requirements that determine overtime eligibility for white-collar workers.

“The current salary level is outdated and no longer does its job of helping to separate salaried white-collar employees who should get overtime pay for working extra hours from those who should be exempt,” the department said.

Those levels were last updated in 2004.

In July 2015, the Labor Department published its proposed changes to the overtime law. It received 270,000 comments during the public comment period, which closed in September. The Labor Department studied those comments and tweaked the proposal before releasing its Final Rule in May.

How was this new salary threshold determined?

The Department of Labor made the new threshold equal to the 40th percentile of earnings of full-time salaried workers in the South, currently the lowest-wage census region in the United States.

Will the salary threshold change in the future?

Yes. Future automatic updates to the salary threshold will occur every three years, beginning on Jan. 1, 2020.

Source: Department of Labor

Reach Liz Segrist at 843-849-3119.

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