León Cosgrove

New Overtime Exemption Rule: Friend or Foe?

By: John D. Bosco

An office worker sits working in an empty office working overtime.On May 18, 2016, President Obama and Department of Labor (DOL) Secretary Perez announced the publication of the DOL’s final rule updating its overtime regulations. The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level defining an exempt employee (from $455 to $913 per week) will be effective on that date.

From its inception, the Fair Labor Standards Act gave most Americans the right to a minimum wage and time-and-a-half pay for more than 40 hours of work in a week. These rules apply to most hourly and salaried workers, but not to some white-collar workers whose salaries and duties exempt them from the overtime pay requirement. Nevertheless, the white-collar exemption salary level set in 2004 ($455 per week or $23,660 a year), meant that workers earning less than the poverty line for a family of four might still earn too much to qualify for overtime. Now, the new rule will entitle most salaried workers earning less than $913 a week ($47,476 a year) to overtime pay.


The Employer’s Conundrum

Increasing the number of overtime-eligible workers gives employers a choice: Employers can either increase their employees’ salaries to at least the new salary threshold, pay workers overtime for extra hours, or limit their employees to 40 hours per week.

If some employees are close to the threshold salary, $47,476 per year, employers will likely choose to increase these salaries to meet the new threshold, allowing these employees to remain exempt and ineligible for overtime premiums.

Employers might also convert employees to an hourly rate assuming a 40-hour work week. This is the easiest but most expensive option, as any hours above 40 will need to be paid at overtime premiums.

Another option is to convert the employees to an hourly rate based on an estimate of their average hours worked. This will likely be a popular option because it will allow employers to comply with the new guidelines while minimizing the cost of overtime.

While the impetus behind the new rule is to put more money in the middle-class worker’s pocket and improve work-life balance, employers in many industries will have to alter their staffing operations to ensure compliance.

 
RETAIL INDUSTRY:

Retail managers’ job roles naturally overlap with those of hourly employees, which is an essential aspect to serving in their capacities as managers. Now, managers and professionals who make more than the minimum can be declared exempt, but only if they meet certain conditions, such as having supervision of other workers as their primary duty.

Even with mandated overtime pay, many retail employees may not actually see a change in net pay. Instead, employers may decide to reduce workers’ hours and spread out responsibilities among part-time workers. Other workers may not see bigger paychecks if their base pay is cut to make up the difference.

 
RESTAURANT INDUSTRY:

Critics in the restaurant industry believe that the new regulations will limit employment and advancement opportunities in the restaurant industry. The “primary duty” test will now be used to figure out whether exemptions apply, and workers who fall under the executive, administrative or professional exemptions will not spend more than half their time on nonexempt tasks.

Since assistant managers in the restaurant and retail industries do much of the same tasks as the employees they oversee, restaurants and retailers may allot fewer hours to assistant managers and other similar positions in order to avoid having to pay higher overtime costs.

 
HOTEL INDUSTRY:

The range of job roles in any hotel makes the hospitality industry another hard-hit sector. While a hotel manager will likely be exempt, and a bellhop likely would not be, many hotel jobs are harder to classify. Executive employees might include assistant managers and supervisors within different hotel departments. But the rules make it hard to exempt employees in supervisory roles who spend much of their time performing similar work as non-exempt workers. Employers can reclassify hotel assistant managers and supervisors as non-exempt and eligible for overtime pay, and manage their hours to ensure they stay under forty.

 
HEALTHCARE INDUSTRY:

Hospitals typically employ a wide range of service workers, including cafeteria staff and gift shop managers. Most of these service workers are already hourly employees earning overtime, so the new regulations might not affect them significantly. Nevertheless, workers in management positions in those departments, such as cafeteria and gift shop managers, will be affected. Before the regulations, they might have been exempt and ineligible for overtime. Going forward, if they earn less than $50,000 annually, they won’t be exempt, regardless of their job responsibilities.

Employers will be subject to penalties if they misclassify employees. In the case of misclassification, the DOL can issue a finding of back wages. This would be done by calculating what the overtime pay should have been, plus an equal amount of the back wages as liquidated damages at 100% of the back wage amount. A claim might arise through private litigation by an impacted employee on an individual or a collective basis, pursuing back wages and overtime for themselves and for similarly situated persons. Plaintiff employees can recover liquidated damages at 100% and back wages that are owed, as well as attorney’s fees.

 
PROTECTING WORKPLACE ADVANCEMENT AND OPPORTUNITY ACT

Employers and small-businesses opposed to the new regulations might breathe a sigh of relief if the Protecting Workplace Advancement and Opportunity Act is passed by Congress. With Congressional action, the bill would nullify the new DOL regulations. The bill’s sponsor, Senator Tim Scott of South Carolina, called the DOL’s overtime proposal “irresponsible.”

The legislation would not ban the DOL from enacting a new overtime rule, but seeks to restrict the Department from changing overtime rules without considering the economic impact. The Protecting Workplace Advancement and Opportunity Act would require that any changes to the duties tests be made available for public review and comment before being made into law, and would also prohibit automatic annual increases that are intended to rise with inflation.

In addition, courts may scrutinize DOL regulations that change the agencies previous positions. A recent U.S. Supreme Court decision found that the DOL failed to properly explain the reasons behind its rule that car dealership service advisers should qualify for overtime. See Encino Motorcars LLC v. Hector Navarro et al., Case No. 15-415, Supreme Court of the United States.

The justices voted 6-2 to vacate the Ninth Circuit’s March 2015 decision (that had been challenged by California car dealership Encino Motorcars LLC) that service advisers—workers at car dealerships who speak with customers about the work on their vehicles—should be eligible to receive overtime compensation.

Led by Justice Anthony Kennedy, the majority ordered the Ninth Circuit to reconsider the issue without giving weight to regulations finalized by the DOL in 2011 that service advisers were not exempt from overtime pay. Indeed, the justices stated that given decades of industry reliance on the DOL’s prior policy that service advisers were exempt, the agency’s explanation for changing its position needed further explanation.

 
TIME TO IMPLEMENT CHANGES:

In the meantime, with less than 200 days until the proposed start-date, employers should:

• consider changes to staffing or salary levels;

• analyze staffing patterns to eliminate unnecessary hours;

• prepare budgets to account for increased overtime expenditures;

• closely monitor and manage hours worked to minimize overtime exposure; and

• hire additional workers to minimize overtime expenses.

 
Being proactive will not only minimize your litigation risk, but will foster employee goodwill and a more productive work environment.

 

JohnBosco_BW_WebJohn Bosco is a partner in the Dallas, Texas, office of León Cosgrove, LLC who focuses his practice on the defense and trial of complex labor and employment and accessibility matters in federal and state courts across the country.