Overtime Rule Change Bad for Business?

HR, labor advocates make their case at House hearing; SHRM stresses threat to workplace flexibility

The Department of Labor’s (DOL’s) proposed rule to expand mandatory overtime pay under the Fair Labor Standards Act (FLSA) would present such a financial hardship that many small companies and community service providers would be forced to close, representatives of those organizations say.

Elizabeth Hays, SHRM-SCP, is director of human resources at Mars Home for Youth (MHY) Family Services, a Mars, Pa., nonprofit that serves at-risk youth. Testifying at a House subcommittee hearing on July 23, she detailed the blow the proposed changes would have on organizations that, by necessity, compensate employees at the lower end of the pay scale.

“Raising the exempt salary threshold under the new FLSA regulations to the $50,440 threshold literally presents the risk of [MHY Family Services] closing its doors,” said Hays, representing the Society for Human Resource Management (SHRM) before the U.S. House Subcommittee on Workforce Protections.

Most of her organization’s exempt employees are paid less than $50,000 and would become eligible for overtime under the proposal. “If these regulations were to be implemented as proposed, MHY will likely have to decrease services because we would not be able to afford the additional overtime pay,” she said.

HR’s Challenges

Hays also presented comments from SHRM highlighting HR professionals’ concerns about the proposal, including that:

  • The significant increase in the salary threshold presents challenges for employers in industries with lower salaries and in certain areas of the country (rural areas and the Southeast and Midwest, as examples).
  • The automatic wage adjustments will influence employers’ compensation decisions on merit pay and contribute to salary compression. Adjustments also will have ripple effects for HR policies and have consequences for workers’ compensation, payroll taxes and employee benefits.
  • The fact that no changes to the duties test were announced has resulted in a period of uncertainty for employers. SHRM is concerned that the DOL still may change the duties test, which would require many employers to restructure their workforce. SHRM is calling for a full comment period for any changes to the duties test.
  • Expanding overtime eligibility will not necessarily result in a windfall of overtime income for newly classified nonexempt employees. Employers will likely cap or eliminate access to overtime work or adjust salaries to ensure that an employee’s total wages will remain the same.

Workplace Flexibility

Tammy McCutchen, former administrator of the DOL’s Wage and Hour Division under President George W. Bush and an employment attorney with Littler, was among witnesses who addressed flexibility issues during her testimony. In response to a question from subcommittee chairman Rep. Tim Walberg, R-Mich., McCutchen said “a particular concern is the executive exemption where the Department of Labor has suggested they might adopt a California rule to require 50 percent of an exempt employee’s time to be spent only in exempt work, which [doesn’t reflect] the realities of the workplace today.”

“We’re not in a 1930s industrial economy where you have union work and nonunion work,” McCutchen said. “We have exempt employees who, for employee morale and to make sure the businesses are running effectively, pitch in and do nonexempt work. And you shouldn’t lose the exemption when you walk to the copying machine and do your own photocopies rather than asking your secretary to do it. Those types of changes, I think, would be very concerning and not reflect the modern workplace.”

A related concern, she added, is “if we have another major change to the duties test, that we’ll see even more litigation.”

Separate written testimony co-signed by SHRM and submitted by the Partnership to Protect Workplace Opportunity (PPWO), an employers’ coalition, also addressed the proposed rule’s effect on workplace flexibility.

“The change to nonexempt status means that many employees would lose the ability to structure their time to address needs such as attending their child’s school activities or scheduling doctors’ appointments,” PPWO’s comments said. “Many other employees would lose the opportunity to work from home or remotely, as it can be difficult for employers to track employees’ hours in those situations. Employers are also more reluctant to provide nonexempt employees with mobile devices or may place restrictions on their use, as employers need to account for any time employees spend on such devices.”

Similarly, the proposed increase in the salary level would make it difficult to maintain part-time exempt positions. “Under the current salary requirement, a part-time, prorated salary is sufficient to establish the exemption (provided that the prorated amount exceeds $455 per week),” PPWO said. “The proposed new amount makes such an arrangement far more difficult, effectively eliminating some flexible workplace arrangements. If an employee’s prorated salary is not in excess of the new salary amount, that employee would now need to meticulously record his or her working hours, even if he or she never approaches 40 hours, because the FLSA’s ‘hours worked’ recordkeeping obligations apply to all nonexempt employees.”

Incentive Payments

Another issue that has not received much attention is “when employees are converted to nonexempt status, they often find that they have lost their ability to earn incentive pay (e.g., bonuses),” PPWO contended.

Under the FLSA regulations, the coalition explained, employers that provide incentive payments to hourly employees must include those payments in the employee’s “regular pay rate” for purposes of calculating overtime pay, even if the bonus is provided months after the overtime takes place. “Faced with the difficult recalculation of overtime rates—sometimes for every pay period in a year—employers often simply forgo these incentive payments to nonexempt employees rather than attempt to perform the required calculations,” PPWO warned.

Labor Advocates Have Their Say

Ross Eisenbrey, vice president of the Economic Policy Institute, a liberal policy think tank, testified in support of the DOL’s proposed rule, arguing that “the erosion of overtime rights over the last 40 years is emblematic of the erosion of the living standards of America’s middle class over the same time period.”

Echoing the views of others who contend it is not in the self-interest of employers to pay fair wages unless they face severe penalties for failing to do so, Eisenbrey said that “The loss of overtime protection for so many workers is just one of many changes in the rules governing our economy that have helped the elite and powerful at the expense of average working people.”

He added, “Workers who are exempt do not have to be paid a dime for the extra hours they work, whether it’s two hours or 20. In fact, they don’t even have to be paid the minimum wage, and some so-called managers have found themselves working so many hours that their effective hourly rate actually falls below the minimum wage.”

When asked by subcommittee member Rep. Marcia L. Fudge, D-Ohio, “is there any data that you’re aware of that supports the premise that higher wages causes job loss,” Eisenbrey replied, “No, I think that one of the big problems with our economy right now is that wages have been held down so long that the power of consumers has been reduced, and therefore businesses are not hiring; they don’t have the customers they need. That’s what every survey of small business says, by the way. That the problem is not regulations.”


Stephen Miller, CEBS, is an online editor/manager for SHRM.

FLSA Update – DOL Issues Its Long-Awaited Overtime Proposal

On June 30, the U.S. Department of Labor (DOL) announced proposed changes to the part 541 Fair Labor Standards Act (FLSA) regulations governing overtime determination and coverage. While it was anticipated that the DOL would increase the minimum salary level, which has been set at $455 per week since 2004, it was not clear what salary level the department would choose or how quickly it would be implemented. In addition, there was an expectation that changes would also be proposed to the duties test portion of the 541 FLSA regulation.

Under the proposal, the salary level would be set equal to the 40th percentile of earnings for full-time salaried employees—this is estimated to be $970 per week in 2016. The proposal also raises the highly compensated salary to the 90th percentile of earnings for full-time salaried employees, or $122,148 annually. For the first time, DOL is proposing to include a mechanism to automatically update the salary level on an annual basis. DOL is seeking input on whether to use a fixed percentage of wages such as the 40th percentile of earnings or to base the annual increase to the salary level on the Consumer Price Index for All Urban Consumers (CPI-U), a measure that calculates inflation by measuring the average change over time in the prices paid by urban consumers.

In an unexpected move, the DOL did not suggest specific modifications to the 541 FLSA duites test. Instead, the proposed regulation asks a series of questions seeking input on whether changes are needed to the duties test and if so, what changes should be made. The department also seeks input on what types of examples to provide in the final regulation to illustrate how the exemptions may apply to specific jobs.

The proposed rule was published in the Federal Register on July 6, and comments are due to the DOL on or before September 4, 2015. Several stakeholders, including SHRM, are asking for additional time in order to gather member input and provide comprehensive comments on the proposal. We don’t yet know whether an extension to the comment period will be granted. In the meantime, SHRM is moving full steam ahead in making sure our members are well-briefed about the potential implications of the rule, and how they can best participate in the regulatory process in the coming months.

To provide HR professionals with immediate and timely information on this newly proposed rule, SHRM hosted a webcast on July 9 dedicated to these changes to the DOL’s overtime rules. Presenters Michael Eastman, of Norris, Tysse, Lampley & Lakis LLP, and Nancy Hammer, of SHRM’s Government Affairs team, gave special insight into the proposed changes, the potential impact on the HR profession, and how HR professionals can best be involved in this process. Members may access an archived version of the webcast HERE.

In addition, SHRM has created a special section in its HR Policy Action Center dedicated to content and advocacy efforts surrounding these changes to overtime regulations. Visit http://www.advocacy.shrm.org/overtime to review background on this issue, to read SHRM’s “8 Things to Know About Newly Proposed Overtime Regulations,” to participate in the “Share Your Story” feature about the impact the new proposed overtime rules could have on employers and employees, and to stay informed about how to raise your HR voice in the coming months as this regulatory issue develops.