Mark Smith's Analyst Perspectives

Through a federal rule referred to as “Overtime Rule” and part of Title 29 regulations was issued on May 18^th, 2016 by the Department of Labor (DOL), the Obama administration now mandates that unless they meet criteria for exemption, employees paid less than $47,476 ($22.825 per hour) are entitled to overtime pay when they work more than 40 hours per week. The rule change, which goes into effective on December 1, 2016, is intended to apply to executive, administrative and professional employees; it has exemptions for teachers, lawyers and other specific jobs and industries.

The new limit, which is detailed in a DOL summary and further described in a distributable document and a set of frequently asked questions (FAQ), is a 100.7 percent increase over the previous overtime trigger salary level of $23,660 ($11.375 per hour), set in 2004. According to the administration the new rule affects 4.23 million workers (which by the way at this writing references  “white college workers” rather than “white collar workers”) among an estimated 8.9 million overtime-eligible salaried employees in the U.S. According to the DOL, 17.5 percent of the newly eligible workers are over 55 years of age, 21.2 percent  from 45 to 54, 22.4 percent  from 35 to 44, 31.3 percent  from 25 to 34 and 7.4 percent  under the age of 25. The new rule also establishes an automatic update every three years to the maximum qualifying salary. The rule permits up to 10 percent of the salary to come from nondiscretionary bonuses, incentives and commissions or through an end-of-quarter catchup payment.

The new rule is part of a set of regulations that specify how the minimum wage and overtime pay protections of the Fair Labor Standards Act (FSLA) are to be administered. Originally intended to eliminate potential sweatshops that resulted from the great depression are part of protections for “white collar” workers. President Obama embraced this agenda when he signed his directive in 2014. But the president’s good intentions can have side effects – in this case, the increase could limit options entry-level workers, whether college graduates or those heading into a new career path, who might want to invest time learning beyond standard training to better their value to the organization. In fact, it even could limit those who work in human resources who seek to be able to spend extra time understanding this DOL legislation and its impact – they could find themselves in an overtime situation despite the fact that it is an opportunity to better their skills to the benefit of their organization. Spending more time to learn skills for a white collar position should not be prohibited but encouraged.

Let me make this more personal. I began my career 28 years ago by relocating to a major metropolitan area to take a technical operations position at a significantly low salary. I accepted the salaried position knowing that I would barely be able to maintain a living because the opportunity was more than worth it, enabling me to break into a company so I could establish the experience and skills not available anywhere else. I was not a college graduate, did not have specialized or advanced knowledge but was willing to apply myself – to use my place of work as a place of education to the benefit of both the organization and myself. Over a number of years I was a hard and dedicated worker, sacrificing a personal life to work 50 to 60 hours per week so that I could advance my job level and salary. Under this new rule the company could easily have been in violation of DOL regulations, and the employer probably would have required that employees not work more than 40 hours.

Three decades later, how much has changed for a broad range of private-sector white collar employees who might not have either a college education or skills in the industry they want to work in? They may well be trying to restart their career but now will not be able to spend time at work at or related to the job that could be construed as overtime. The new rule will force employers to establish new employee handbook guidelines and agreements that direct employees and maybe not just the non-exempt ones not to work more than 40 hours or be in violation of employment rules and subject to termination. And employees trying to show a commitment to advance their potential in a range of white collar positions may well find themselves facing the proposition of being dealt with as an hourly employee with what I would define as a transaction level relationship with the company.

The Department of Labor suggests that to accommodate the new regulations businesses of all sizes can raise salaries to maintain the overtime exemption, pay overtime beyond 40 hours, reorganize workloads, adjust schedules or spread work hours – or, of course, adjust wages. The last recommendation in practice means the employer, to compensate for extra time worked beyond a 40 hour work week, might well have to have a difficult conversation with its employee to induce him or her to accept a lower salary plus overtime pay. With no exemption for size or location of business, this new rule will mean that considerably more time will be spent, unproductively from the company’s point of view, renegotiate its employer-employee relationship.

The DOL states it will not be difficult for employers to track workers’ hours as “employer already has systems and policies in place for dealing with overtime eligible employees so the rule isn’t introducing any new obligations for employers or requirement them to adopt new systems.” Well, the DOL does not realize that many organizations will not have had employees making less than the previous salary threshold but do now under the new level. Moreover, in many cases they were not paying attention to the exemptions because in a small and medium sized business the time required and cost of paying attention to every regulation is prohibitive. For employers, it now becomes a smart move to assess the use of software that employees use to track their hours daily so that managers and management have direct, centralized visibility to time worked. If your organization already uses workforce management software to track hourly workers, it might be able to be used for time worked by salaried employees. In addition, a new generation or human resources management systems (HRMS) have begun to add ability to track time worked by day and projects. Doing what the DOL appears to be recommending – leaving it to employees to track – is a recipe for disaster. Employers and managers should not leave any potential issues or violations in the hands of employees who may or may not track diligently every day. The government in this case has increased the cost of business by inserting the need for business to acquire and deploy software to support tracking hours.

Employers can also examine moving to the use of contingent workers, shifting the responsibility to a third party to deal with the compliance. These contingent labor organizations already have the processes and software to ensure compliance to regulations. A significant number of larger corporations already do this today to eliminate the burdens of hiring and maintaining a workforce. This is in addition to looking at using part-time employees who might work only 32 hours or less and do not fall into other regulatory requirements that increase the cost to a business.

The federal government should also have recognized the geographic diversity of businesses, with many located in areas where the cost of living is less than half what it might be in a metropolitan area. If you read the regulations, it is clear that some areas negotiated exceptions – American Samoa, for example, which has a lower standard test at 84 percent of the $47,476 salary. While exemptions on type of workers like outside sales, computer-related occupations, field of science and learning. Also, there’s a “learned professional exemption” where the “Customarily Acquired by a Prolonged Course of Specialized Instruction” could be the loophole for a large class of employees who can cite some level of related instruction or a degree that’s close enough to the content of their job.

The regulations provide a significant number of exemptions to the overtime rule in executive, administrative and professional areas that include some educators, those in law or medicine and outside sales, computer employees and highly compensated employees. Employers should make sure they are fully examining the available exemptions, even in situations where salaries are above the new threshold at $47,476. Interestingly, the legal and medicine fields are exempt from the salary tests for compliance; why did entry-level lawyers get an exemption? Or those that work to help take care of humans? I could be cynical and say they had great lobbyists. To me, one of the saddest parts of the legislation is where bona fide teachers are exempt where they actually should have salary increases. But the biggest question the regulations raise is why does the overtime rule not apply to these industries?

Should the salary range that triggers overtime have been increased? Yes. But this doubling of the salary level came with little notification to enables businesses to adjust through policies, processes and potential systems; now the regulations will go into effect on Dec. 1, 2016. The DOL did provide notification in July 2015 on the potential changes, so if you were keeping track of the details – which I can guarantee the majority of businesses weren’t doing – you know what’s coming. But since the government lacks any technological sophistication in business registration and notification, it’s not until now that business leaders including CEO, COO, CFO and head of human resources are learning of this and starting to take action. Of course those in larger corporations that have dedicated resources and retained labor lawyers are probably on top of the changes and implementing changes. Remember, though, that the number of small to medium-sized businesses far outnumber the larger ones that typically have more a $1billion in revenue and the DOL did just publish a specific guide to help these smaller-sized organizations.

The federally mandated minimum wage in the United States is $7.25 per hour. It should increase, and many states are already advancing it. In the face of these changes, businesses will have to make some difficult decisions on their ability to operate at current levels and determine the path forward to address increased payroll. Most organizations have budgets and this new regulation will have a direct impact on the budget in the calendar fourth quarter. Clearly, discussion involving at least the CFO and head of human resources will have to happen to develop a plan and determine a course of action. Organizations will need to review job levels and salaries as part of compensation planning to see if they should raise them to the federally mandated minimum to minimize the impact to any issues on the exemptions and requirement to track hours. Many HR organizations might also need to determine if their HRMS is effective at tracking hours worked and compensation processes as our latest human resources research found is one of the top uses of a HRMS and is one of the key factors motivating organizations to change technology providers. There will need to be updates to the employee handbook on overtime, communications to managers and inevitably new agreements or statements to salaried workers within this pay bracket.

Employers should seek labor-related legal counsel to ensure they have assessed their workforce and the situation with respect to exemptions and have plans to mitigate risk. As the new regulation goes into effect some employees may find themselves with a salary increase for the holiday season, or they may find themselves being informed they are no longer able to work extra hours related to their job to improve their career or performance. Some may find their salary reduced to incorporate overtime or may be asked to go to an hourly rate.

While I would agree it is appropriate and necessary for the DOL to establish a salary framework that keeps employers from creating sweatshops and working their employees too extensively, this doubling of the salary level appears to me to be excessive. Employees are always free to decide that they should find a new place of employment, but in this instance the government has taken an action that will force businesses to expend time, resources and money to ensure they stay in compliance. This regulation will impact employers whether they decide to hire college graduates only part-time or as hourly employees at compliant levels or skip them entirely and look for workers with more experience. College graduates are not well prepared by universities or colleges in their degree related to a job opportunity they are applying for in the private sector will require significant training that is not offered by the employer. For those college graduates applying for a job position not related to their degree will need even more training and a larger desire to learn about the position that in both examples will not be possible after December 1st.

The DOL has published its overview of the Overtime rule which portrays the new rule in a positive light: It puts more money into the pockets of many middle class workers or gives them more free time, prevents a future erosion of overtime protections and ensures greater predictability, strengthens overtime protections for salaried workers already entitled to overtime and provides greater clarity and security for workers and employers, improves work-life balance, increases employment by spreading work, improves worker health and increases productivity. All of this may well prove to be true. But all of it could be driven by choices employees make when they take a position and determine the employer they want to work for, rather than constraining employees who want to focus on their career and work hard at their employer.

It is clear that President Obama and Department of Labor have no real understanding of the impact of this change and how it will alter the dynamic of employer-employee relations and impact the employee’s right to work hard, learn more about his or her profession on the job and thus have the opportunity to move up and advance his or her career. If the president and DOL think that employers are going to pay overtime to support an employee’s desire to further training beyond existing ones offered, they are really disconnected from the way business operates. The federal government has now tied the hands of employers and instead created overhead for the private sector. This action is eliminating opportunity at a time where any aging individual who needs to retrain to switch careers will not be able to do so unless employers increase their budget for the workforce. Of course, the money for this will have to come from steps such as increasing margins on products and services that which translate to increased prices that the public may or not choose to pay, reduced benefits to employees like health insurance coverage, increased time off, matching 401k and continuing educational reimbursement, or reducing operational expenses or growth through eliminating new positions and employees.

While the president and DOL view this updated regulation as protection of employees and an expression of the president’s commitment to fair compensation for hard work, in my opinion it is a move that could have the opposite effect. Disrupting the private sector and forcing business to reassess its workforces, salaries and overtime patterns at a time when the focus should be on growth and new hires is really a bad step. Not everyone wants to be forced only work 40 hours on salary and should not be constrained by a federal regulation that forces employers to prevent it from happening.

Mr. President and Department of Labor, after working in small, medium, large and very large business in the private sector from entry-level to executive positions, after having hired or been responsible for hiring hundreds of people, and after starting and leading a small business as CEO over the last 13 years, I have a little more experience on this matter than those who developed the position you and your departments have taken. This action will change the dynamics of the workplace for the worse and have stepped on the potential opportunities of millions of Americans, from college graduates to those who are being forced to transition from trades that are no longer able to provide jobs in this country due to globalization. The view that this new regulation communicates of employers, generalizing that we are not treating our employees properly with fair salaries and so the government needs to wield a stick that is these regulations is incorrect. If you ever want a dose of reality on business and the private sector, let me know; I am more than able to provide some opinion and perspective.

Regards,

Mark Smith

CEO and Chief Research Officer