The Journal Gazette
Sunday, November 06, 2016 5:16 pm

Overtime rule poses challenge

Sherry Slater | The Journal Gazette

If you’re a salaried worker earning less than $913 a week, you might be getting a raise on Dec. 1.

But don’t count on it.

Handing out raises is only one of several ways employers can comply with new overtime rules from the U.S. Department of Labor. The federal agency enforces laws governing workers’ wages, benefits, safety and rights.

Salaried workers earning less than $913 a week – or $47,476 a year – will have to be paid extra when they work more than 40 hours in a week. Labor Department officials have estimated that 4.2 million workers will be affected by the change, including 87,000 in Indiana and 134,000 in Ohio.

Local attorney Anthony Stites has advised clients they have several options for addressing the Fair Labor Standards Act revision. But employers who pay big bonuses tied to worker performance are struggling the most, he said, to revise their compensation structures.

That’s assuming they need to. Indiana is among almost two dozen states that filed a lawsuit trying to stop the increase from taking effect.

Why the change?

Anyone paid a set amount each week – regardless of how many hours are worked – is considered salaried and exempt from overtime pay requirements. Currently, the minimum pay for being classified salaried is $455 a week.

By contrast, hourly employees must be paid overtime for each hour worked beyond 40. Federal rules set overtime pay at 11/2 times a worker’s standard hourly rate.

Federal officials have established that only certain positions can be classified salaried and exempt. Others must be paid hourly.

In general, managers and professionals whose jobs require discretion and independent judgment meet the requirements. Production positions – or blue-collar jobs – must be paid hourly.

"The white-collar exemption was originally meant for highly paid workers who had better benefits, job security and opportunity for advancement," the Labor Department states in a summary of the rule change.

But the minimum salary for such workers has been updated only once since the 1970s, causing it to lag far behind what so-called "highly paid workers" are now paid.

That has allowed some employers to take advantage of salaried workers, requiring them to be on the job for 50, 60, 70 or more hours a week without overtime pay. It’s a situation, the Labor Department says, that has some workers whose income falls below the federal poverty line earning too much to automatically qualify for overtime.

Federal officials have included a provision to increase the minimum every three years going forward, which should prevent the rate from falling so far behind.

President Barack Obama directed the secretary of labor to update overtime regulations in 2014. After months of information gathering, the department issued a proposal, reviewed feedback and crafted the final rule that takes effect next month.

Stites, a Barrett & ­McNagny partner who practices employment law, said the timing isn’t ideal for employers who grant raises effective Jan. 1.

Also, businesses that have carefully budgeted payroll expenses for the remainder of 2016 could be caught short.

That could especially be true for small employers and nonprofits, he said.

Payment options

Kathleen Anderson, a Barnes & Thornburg partner who also practices employment law, has been studying the reactions to overtime rules changes.

"It’s a huge range of response, depending on the kind of employer," she said.

In general, employers with more workers and more sophisticated payroll systems are better suited to handle the changes, Anderson said.

"If you’re a very small employer," she added, "you’re going to make very different choices than if you have 1,000 employees."

To keep from paying a worker overtime, an employer can bump up the employee’s salary to the minimum for salaried and exempt status. That could be a popular option for dealing with employees who already earn almost $913 a week, Stites said.

Another scenario is for employers to continue an employee at a salary of less than $913 a week – but then pay time-and-a-half for any hours over 40, the attorney said.

But employers don’t have to put more money in workers’ pockets to stay on the right side of the feds.

Some companies will raise salaries but stop paying a portion of workers’ health insurance premiums. The idea, Stites said, would be that workers would use the additional pay to cover the full premiums.

In a fifth option, employers could calculate a way to preserve the status quo. By dividing a worker’s salary by how many hours he’s expected to work, the employer could come up with an hourly wage that factors in some hours at 11/2 times the base hourly pay. So even though the worker would be paid overtime, his paycheck would be about the same amount.

Employers that don’t want to pay overtime rates of 11/2 times regular hourly wages could limit previously salaried workers to 40 hours a week and hire additional employees, if necessary.

That option would create jobs, which could be good for the economy. But some companies are reluctant to take on more workers during boom times because they don’t want to cut jobs if – or when – customer demand slows.

Practical matters

Various retailers and chain restaurants are expected to be hit hard by the new rules.

Store managers and assistant managers can be required to work 50 hours a week or more for a set salary. If a worker shows up late – or not at all – the manager on duty can be forced to work additional hours for no extra pay to cover the shift.

But the National Retail Federation, a trade association in Washington, has criticized the overtime rules on behalf of its members, saying the change could trigger demotions. Any new jobs created, the group argues, would likely be only part time.

"Research conducted for NRF shows that the overtime regulations will force employers to limit hours or cut base pay in order to make up for the added payroll costs, leaving most workers with no increase in take-home pay despite added administrative costs," federation officials said in a statement.

The association claims that retail employees don’t support the change, either.

"A separate survey found that the majority of retail managers and assistant managers the regulations are supposed to help oppose the plan," the organization said.

Anderson, the local attorney, said that view doesn’t represent everyone.

"I think a lot of workers think it’s a good thing," she said. "And for some, it will be a good thing, depending on how the employer responds."

"Conceivably," she added, "someone could get less."

Employers that build bonuses into their wage structure are approaching the changes carefully.

Steel Dynamics Inc., which relies heavily on incentives when paying its workers, will have to tweak its formula.

The Fort Wayne-based steelmaker believes it’s important "to align the objectives of the employee with those of the organization," said Jeff Hansen, vice president of safety and human resources.

"This alignment allows for outstanding teamwork … at all levels of the organization," he said. "In many cases, our incentive bonus compensation exceeds over half of an employee’s total compensation."

That won’t change, even though it seems as though the Labor Department didn’t take this type of compensation package into consideration when changing the rules, Hansen said in an email.

"Fortunately for SDI, the impact is minimal and we will be able to comply," he said. "We will continue to focus our efforts on ensuring that our employees are well compensated for their contributions to the success of the company."

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