New regulations from the Obama administration requiring companies to dramatically expand overtime pay remain in legislative limbo, likely pending results of the upcoming national election.
The new rules (detailed below) were announced in May of this year, and originally set to go into effect December 1. The U.S. House of Representatives, however, passed a bill on September 29, which would delay implementation until the summer of 2017.
It is likely the ultimate fate of the new rules hinge on the national election November 8, as a Democratic administration would be likely to uphold them, while a Republican administration could reject or alter them.
The new regulations, issued by the U.S. Department of Labor would require businesses to pay much more in overtime wages.
Under the old rules, a worker who made more than $23,660 per year (or $455 a week) was exempt from overtime pay for working more than 40 hours in a week. The new regulations would raise that number up to $47,476 a year; meaning, for example, a salaried employee now making $35,000 a year would be paid extra for any hours beyond 40 per week.
That is a greatly simplified description of the law. The details of the legislation are much more arcane, says James B. Sherman, President and CEO of Wessels Sherman, a Chicago-based employment law firm. “The law is not as simple as it looks, and there is a lot to learn about what is required when determining which employees are exempt. It’s not just a matter of who is salaried and who is not.”
While the law may be confusing in its details, the penalties are large and straightforward. “The penalties for violating wage and hour laws can be severe,” says Matthew C. Heerde, a New York City-based employment law attorney. “They can be devastating for a small business. I have dealt with employers who contemplated bankruptcies after being caught.”
Companies should bear in mind that they will be responsible for supporting exemption decisions. “The law assumes everyone is entitled to receive overtime pay unless the employer can show that certain employees are exempt,” warns Ann F. Kiernan, a New Brunswick, NJ-based employment law attorney and lead trainer at Fair Measures, a management practices consulting firm in Denver.
More workers qualify
The big news is that, if implemented, these new regulations escalate the risk of making employee classification errors. The qualifying salary floor would be raised to $913 per week (up from a former $455). Employees paid less would then be classified as “nonexempt” (that means “nonexempt from overtime”), and paid time-and-a-half when working more than 40 hours per week.
Would individuals paid more than $913 weekly be exempt from overtime? Maybe. They also have to meet strict — and often confusing — standards about just how they are paid and what job duties they perform.
“A more than doubling of the salary level required for exempt status means employers must make some pretty tough decisions as to whether they want to bump up salaries or reclassify employees,” says S. Libby Henninger, a shareholder in the Washington, DC office of San Francisco-based Littler Mendelson, the nation’s largest employment law firm. “It can mean not just the paying of more overtime, but also a change in how the business operates.”
For example, businesses may have to mandate that employees newly classified as nonexempt cease doing any work at home, including the answering of email, as such activities may push them continually over the 40-hour weekly work limit, leading to significant increases in payroll costs.
The new regulations could have a significant impact on retailing, which tends to be a lower wage industry, says Henninger. “Retailers tend to have a lot of managers and assistant managers who are making less than the new salary floor for exempt status.” Converting these individuals to nonexempt status will be costly.
The lower the average pay scale in any business or region, the higher the number of people subject to reclassification under the new rules. “Some of the biggest impact is being felt by smaller businesses, and those in less urban areas where hourly wages and salaries are lower,” says Henninger. “Many of these businesses are reclassifying a third of their workforce.”
To Be Continued
Stay tuned for the outcome of this regulatory struggle, which is likely be decided in the coming weeks. Regardless of the outcome, employers should stay current on wage law compliance issues.
“Wage and hour law compliance may be the last thing on your mind as you run your business,” says Heerde. “But keep in mind it can be a nightmare if one of your employees finds an attorney who realizes the individual is owed money, or if a federal or state agency shows up at your door. An ounce of prevention is worth a pound of cure.”
