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New Overtime Rule Hitting Some Employers Harder Than Others

Dec. 31, 2019, 6:48 PM

A significant update to federal overtime pay eligibility takes effect this week, and while it’s drawn little fanfare from corporations, lawyers say the change is creating compliance headaches for other workforce sectors.

Starting Jan. 1, the Labor Department will begin enforcing an annual salary threshold of $35,568, below which workers qualify for the time-and-a-half overtime premium when they work over 40 hours in a week. That represents a boost from the previous salary cutoff of $23,660, in place since 2004.

Although the new rule is projected to extend overtime wages to some 1.3 million employees, companies that already offer all salaried workers above $35,000 won’t have the budgetary adjustments and legal risks that typically come with major labor regulations.

To the frustration of worker advocates and the delight of industry groups, the rule is a compromise from an Obama-era iteration, which was struck down in court before it could take effect. That 2016 rule would’ve lifted the salary level to $47,476 and qualified about three times more workers for overtime.

Even the more modest bump to the salary threshold is challenging for smaller employers in select regions of the country who are forced to make sensitive choices on payroll, staffing, and benefits.

Now that investigators from the DOL Wage and Hour Division and private attorneys can begin enforcing the rule, here are four things to consider about the first federal revision to the salary level for overtime pay in 16 years.

Location, Location, Location

Businesses in rural communities or in regions with low cost of living, such as the South and Midwest, are more likely to face complications adapting to the rule change than employers in more expensive, higher-wage cities, such as New York or Chicago, multiple attorneys told Bloomberg Law.

Multi-state corporations sometimes pay workers different salaries by region, meaning the larger companies must roll out location-based compliance plans.

“I’m aware of clients who pay some positions in the New York City area differently than they do in say, Macon, Georgia, which makes sense because the cost of living is different,” said Lee Schreter, who co-chairs the wage-hour practice group at management-side law firm Littler Mendelson.

But for many of the firms in higher-cost areas, a $35,000 federal salary level is supplanted by higher overtime standards under state or city laws. Washington state, for instance, later this year will start gradually upping its overtime threshold in phases until it reaches $83,000 in 2028.

Nonprofits, Small Businesses Brace for Impact

Nonprofits, small businesses, and other employers lacking the budgetary flexibility to absorb higher labor costs have been making tough decisions to prepare for the rule’s Jan. 1 enforcement date.

The DOL and industry trade groups have spent the last few months educating some employers—particularly those that don’t have a human resources department or in-house counsel—on their new responsibilities and their need to adjust payroll practices.

“Restaurants and small retail, I think, are struggling the most with how should I go about doing this, even if they have only one or two managers” who earn below the new threshold, said Elizabeth Milito, senior executive counsel at the National Federation of Independent Business. Drawing on the questions she’s fielding from members, the common refrain is, “‘We can’t increase our revenues to justify a pay increase, we don’t really have any good options, but we do need to make a decision on how to go about this,” Milito said.

Small businesses have been alternating between giving managers a raise to $35,568 or higher to maintain their exemption from overtime, or reclassifying them as overtime-eligible while closely tracking their hours. Frequently, the decision turns on how many employees are affected; employers are more likely to raise salaries if it’s only one worker and convert them to nonexempt if it’s three or four workers, she said. Another option is to tell employees they’re getting a salary increase but that it replaces their usual bonus that comes later in the year.

Meanwhile, nonprofits generally are having an easier time preparing for this rule than the higher threshold they were gearing up to face in 2016, but some organizations still are struggling to cobble together the financing.

“Nonprofits typically can’t raise prices. So we have to go to funders and seek more funding,” said David Thompson, vice president of public policy at the National Council of Nonprofits. Other options include cutting back on employee hours, such as restricting their use of work email at night, and reducing benefits, he said.

Obama Rule Still Unofficial Standard

Many companies seem to be ambivalent about the rule change because they’ve been complying with the 2016 regulation all along.

A federal judge halted the Obama-era rule nine days before it was set to take effect, but not before employers such as Walmart Inc. started voluntarily complying. The majority of those early adopting businesses opted to keep their plans in place rather than take away new overtime coverage for those earning up to $47,000 or backtrack on raises.

Technically, the department’s enforcement of a $35,000 salary cutoff presents an opportunity for those businesses to reconsider their decisions from three years ago. But the possible hit on employee morale makes it a less palatable route.

“There’s no appetite for that; in this competitive job market, they don’t want to be seen as taking the benefit away,” said Jonathan Keselenko, who represents employers as a partner at Foley Hoag in Boston.

Litigation Looms

The start of DOL enforcement this week doesn’t guarantee the new overtime salary level is fixed for the near future.

Workers’ rights lawyers are searching for plaintiffs to sue the Trump DOL in an effort to ease the pathway for a new regulation that would extend overtime to more workers.

The litigation prospects are tough to predict, but it’s safe to say the issue won’t be going away, regardless of who’s in the White House after the 2020 election.

To contact the reporter on this story: Ben Penn in Washington at bpenn@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; John Lauinger at jlauinger@bloomberglaw.com

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