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New overtime rule for salaried workers pushes employers to respond

New overtime rule for salaried workers pushes employers to respond

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Greg Brock worries that a new federal rule governing overtime pay for salaried workers could bleed the life from his small company’s uniquely unfettered culture — an attribute he said attracts talented, creative people to Firefli.

The digital strategy firm, based in a renovated building in downtown Roanoke, currently has eight employees, including Brock, who is CEO and Firefli’s founder.

Brock handles most human resources tasks for the firm, which emphasizes flexible hours as a key recruitment lure. He said he believes roughly half of Firefli’s staff, all salaried workers, could be affected by the new overtime rule but said he hasn’t had time yet to do related analysis.

The U.S. Department of Labor’s controversial new rule, announced in May and set to take effect Dec. 1, more than doubles the threshold for overtime pay for salaried workers.

Under the new law, most salaried employees making less than $47,476 a year, which equals $913 per week, must be paid time-and-a-half if they work more than 40 hours a week. The current threshold, last updated in 2004, is $23,660, or $455 a week, meaning that salaried employees above that threshold have been exempt from overtime pay.

Many businesses, local governments, universities and nonprofits are scrambling to identify workers who might be impacted by the new rule and to weigh their options for complying.

Peter Ennis, a Pittsburgh-based lawyer experienced in employment law for Buchanan Ingersoll & Rooney, said employers should let salaried workers know what’s afoot as soon as they can.

Lawyer King Tower and colleagues at Woods Rogers who specialize in employment law have worked with regional businesses, institutions of higher education, local governments and nonprofits to help them understand and prepare for the new rule’s implications.

Tower said most businesses or organizations large enough to have a human resources specialist are likely aware of the rule change but said some HR workers might be struggling to get the attention of senior management.

Meanwhile, Tower said, “Smaller employers may still be completely unaware.”

Victory or disaster?

President Barack Obama, many workforce advocates, labor unions, some economists and some businesses have celebrated the new rule as a victory for the struggling middle class.

In March 2014, Obama directed the secretary of labor to update the overtime regulations for salaried workers. Referencing the results, he said the updated rule is “one of the most important steps we’re taking to help grow middle-class wages and put $12 billion more dollars in the pockets of hardworking Americans over the next 10 years.”

But many businesses and business groups have cried foul. They contend that the new rule’s consequences, both intended and unintended, will add to the burdens of businesses large and small still recovering from the Great Recession and could have negative outcomes for employees.

Tower said many businesses in the region seem to oppose such a large jump in the threshold for exempt employees while recognizing that some increase was likely necessary.

The Department of Labor set the new salary threshold at the 40th percentile of weekly earnings for full-time salaried workers in the nation’s lowest-wage Census region, which currently is the South.

After a business has determined which employees the new rule might affect, the next step is weighing how to adjust their pay or employment to comply with the law.

Should they offer a raise to a salaried employee to boost his pay past the new threshold? Should they convert a salaried worker to an hourly employee and limit her hours? Should they hire new workers at lower pay to handle some of the work that might require overtime? How about reducing the pay rate of newly non-exempt employees who typically work overtime so that their pay each week stays about the same, including overtime?

Businesses also might opt for layoffs while hiring independent contractors and freelancers.

“There are multiple possible approaches, some more attractive and effective than others,” said Andy Klein, a principal with Titan-Gallagher, a Richmond-based human resources consulting firm.

Klein said he has heard from dozens of companies seeking help with complying with the rule. To date, he said, no one has expressed an intention to convert a salaried worker to hourly. He echoed Brock’s concern.

“Talent, good talent, is getting hard to find,” Klein said. “This is especially true of skilled and experienced talent. Most employers want to keep employees ‘whole’ and in their employ.”

Lindsay Coobs, a human resources consultant serving the Roanoke regional market for Employers Advantage, has fielded similar inquiries.

“Because the deadline for this change is Dec. 1, businesses need to quickly find out how many employees will be affected and make a plan for compliance,” she said.

The Department of Labor estimates that the new rule could extend the right to overtime pay to about 4.2 million workers who are currently exempt. It estimates that about 119,000 more workers in Virginia will be eligible for overtime under the rule.

The left-leaning Economic Policy Institute’s estimates are much higher. It predicts that about 12.5 million salaried workers nationwide and about 333,000 workers in Virginia will directly benefit from the new rule.

The institute said its numbers exceed Department of Labor estimates in part because the institute’s analysis adds workers whose eligibility for overtime it believes was eroded by rule changes in 2004.

Measuring the impacts

Carilion Clinic, the region’s largest employer, with about 12,589 workers, said it assembled a seasoned team of human resources people months ago to prepare for the new rule. It says less than 10 percent of its workforce will be affected.

About 75 percent of Carilion’s workforce is paid hourly and is thus already generally eligible for overtime pay after working more than 40 hours in a week.

Heather Shepardson, Carilion’s vice president of human resources, said the clinic has been “working diligently” to ensure that its handling of affected employees is accurate, fair and in compliance with the new rule.

The city of Roanoke is assessing how the rule might affect its budget, according to an email from Michele Vineyard, director of human resources.

“Local governments are facing challenges similar to private businesses in determining whether to reclassify employees to non-exempt (overtime eligible) or raise salaries to the new threshold and maintain the overtime exempt classification,” Vineyard said.

“We are still in the development stages of how we will implement the changes to be in full compliance by December 1st,” she said.

In May, Molly Corbett, president of the American Council on Education, said that although the council supported raising the salary threshold, the new overtime rule “will harm many higher education institutions, employees and students.”

Corbett said “requiring such a dramatic and costly change to be implemented so quickly will leave many colleges with no choice but to respond to this regulation with a combination of tuition increases, service reductions and, possibly, layoffs.”

She said many non-faculty employees, including admissions recruiters, student affairs officers and athletic coaches and trainers, have jobs ill-suited to hourly wage status.

Jeff Kraus, a spokesman for the Virginia Community College System, said human resources departments “are studying the nuances of the new overtime rule, though we expect it to have little to no impact on how Virginia’s Community Colleges operate.”

Kirk Wehner, director of compensation and performance management in Virginia Tech’s human resources department, said analysis to date suggests about 700 or more Tech employees might be affected by the new rule.

“The impact is very significant,” Wehner said. “We’ve put together a working group to evaluate our options. There is a lot of work to be done.”

One option might be increasing the salary of some currently exempt salaried workers past the new threshold but that could be a costly alternative, he said.

Another option would be changing a salaried position to hourly, but that could affect employee morale, Wehner said.

“It’s a big change,” he said. “I hope one unintended consequence of the new rule isn’t that it puts some medium-sized businesses out of business.”

Eric Terry, president of the Virginia Restaurant, Lodging and Travel Association, believes the hospitality sector will take a big hit.

“We think the new overtime regulations are a disaster for the restaurant and lodging industry because of the number of managers, assistant managers and front office managers who would be affected,” Terry said.

Advance Auto Parts, headquartered in Roanoke, declined to comment about its response to the new overtime rule. The company, whose key executives are based in Raleigh, North Carolina, is a major retailer of auto parts.

Belk department store spokeswoman Jessica Graham said the retailer is “working through the details” of the new rule but declined to comment further.

The National Retail Federation opposes the overtime changes: “The retail industry is concerned because the change in wage levels — if allowed to take effect — would bring many store managers or assistant managers under overtime rules, taking away their ability to use their own discretion in deciding whether to put in the extra hours sometimes needed to do their jobs.”

The federation says it plans to work with Congress “to try to block or amend the changes before they can take effect later this year.” It asks members to support the Protecting Workplace Advancement and Opportunity Act, of which U.S. Rep. Bob Goodlatte, R-Roanoke County, is a co-sponsor.

“The House is prepared to look at all options available to stop this rule, and will work toward bipartisan solutions that will help grow the economy and create private sector jobs,” Goodlatte said.

He said the overtime rule forces American businesses to choose between creating new jobs and complying with new rules from Washington.

“For those companies who can least afford to comply with this new rule — nonprofits, colleges and universities, start-ups, small businesses — forcing them to make such drastic changes in the basic structures of their business plans will mean job cuts, reduced hours and fewer opportunities for the future,” Goodlatte said.

Among other provisions, the Protecting Workplace Advancement and Opportunity Act would require the secretary of labor to conduct an economic analysis of how the overtime rule will affect small businesses, nonprofit organizations, small government jurisdictions “and all other employers” before crafting a new rule.

Meanwhile, U.S. Senators Mark Warner and Tim Kaine, both Democrats, are reviewing the new rule. Both said there has been a need to update overtime regulations for salaried workers.

“Sen. Kaine also understands the concerns of the business, nonprofit and higher education communities, who are concerned that these regulations will be burdensome, and a gradual phase-in would have been better,” said Amy Dudley, a spokeswoman for Kaine.

Rachel Cohen, a spokeswoman for Warner, said the senator “is interested in working with all parties going forward to mitigate the impact on small businesses and ensure that colleges, universities and non-profits in particular are not forced to assume a disproportionate increase in personnel costs.”

Tower said he doubts Congressional efforts to block or amend the law will succeed. He noted that even if legislation makes it to Obama’s desk the president will likely veto it.

The National Federation of Independent Business and the Society for Human Resource Management also have expressed opposition to the new rule.

Better pay, more family time

Yet Ross Eisenbrey, vice president of the Economic Policy Institute, said many businesses opposed to the new overtime rule fail to understand that it will, in a consumer-driven economy, put more money in the pockets of potential customers, many of whom have little discretionary income.

In June testimony before the House Small Business Committee, Eisenbrey said updates to the Fair Labor Standards Act’s overtime rules for salaried employees were long overdue.

“Millions of people will get raises, reduced hours for the same pay or new jobs because of the [Department of Labor’s] action,” he said.

Eisenbrey added, “When [the new rule] takes effect on Dec. 1, giving new protections against overwork to 12.5 million employees, it will be the most important improvement in the labor standards of America’s working families in many years.”

He and others have said many businesses have piled long hours on exempt salaried employees who made more than the current $23,660 threshold. Eisenbrey said “salaried employees need time with their families and time for themselves just as much as hourly employees do.”

When the Economic Policy Institute celebrated the new rule, Gary Johnson, president and CEO of AFI Contractors, a flooring and interiors company based in Toledo, Ohio, added his endorsement. In a June 24 email, he explained why.

“I support it because we need to make sure our employees are not exploited by making them work over 40 hours a week for $23,000 a year,” said Johnson, a former restaurateur and manufacturing sales representative who also worked for a time in the insurance industry.

Firefli CEO Greg Brock said updating the overtime rule might be necessary to ensure that poorly compensated salaried employees aren’t exploited.

“I completely understand the logic and the rationale,” Brock said.

“But it’s a nationwide, blanket approach I don’t think is applicable to all markets. In a business our size, it really causes a scramble to try to figure out, how do you budget for this?”

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