Employers seek counsel on new overtime rules

By Lee Dryden
The Daily Record Newswire
DETROIT — While new federal rules for overtime pay don’t take effect until Dec. 1, lawyers are already fielding questions from business clients.

The U.S. Department of Labor’s final rule updating overtime regulations under the Fair Labor Standards Act — announced May 18 by President Barack Obama and U.S. Labor Secretary Thomas Perez — would potentially provide overtime pay to more than 4 million white-collar workers, including more than 100,000 in Michigan.

The overtime exemption threshold will rise from $23,660 annually or $455 a week to $47,476 annually or $913 a week. Anyone with a salary above the threshold — and passing a “duties test” showing they perform executive, administrative or professional duties — is exempt from receiving overtime.

It is the first adjustment of the threshold since 2004. The labor department will put a mechanism in place to automatically adjust the figure every three years to keep it from becoming outdated. For the first time, employers can use bonuses and incentive payments such as commissions to cover up to 10 percent of the standard salary level, if they
are made on at least a quarterly basis.

Professions such as lawyers, doctors and teachers are not subject to the salary level tests, according to the labor department. There also is an exemption for highly compensated employees who earn more than $134,004 annually under the final rule and satisfy a minimal duties test.

Employers are seeking advice from counsel on what to do with employees who fall between the old and new thresholds. Employees who make just under the new threshold will likely see their pay raised above it so overtime costs can be avoided.

Other employees may see their classification changed to nonexempt and their hours will be tracked much more closely. Their hourly rate might fall or employers may hire more
part-time staff to limit overtime for newly eligible employees.

In some cases, employers will simply have to pay the overtime to employees who previously worked on salary. This is the intent of the federal effort.

In any event, practitioners are advising their business clients to start crunching numbers now so counsel can assist them with creating a game plan that meets requirements while maintaining profits as much as possible.

Clients have been tracking the issue and are moving forward now that the final rule has been released.

“What we’ve seen is people wanting to set up times to talk,” said Brian Schwartz, a principal at Miller Canfield in Detroit. “That’s better than getting calls on Thanks­giving — for them and for us.”

Employers should audit their positions and see if they need to be classified differently, with a close eye on the range between the old and new thresholds, Schwartz said.

“Those are the ones they want to focus on,” he said. “This provides a good opportunity to look at all classifications.

“New regulations will sweep in a bunch of people previously exempt from overtime.”

Terry W. Bonnette, a partner at Nemeth Law PC in Detroit, said employers should do a cost-benefit analysis — including sample payrolls with various options — so there are no surprises at the end of the year.

A target of the change is professions with traditionally lower pay such as the restaurant and retail industries, said Matthew S. Disbrow, a partner at Honigman Miller Schwartz and Cohn LLP in Detroit.

For example, a fast food manager who meets the duties test by doing administrative work could currently be paid $35,000 per year with no overtime during a work week of well beyond 40 hours.

While businesses’ approach to the change will vary, a requirement to pay more overtime is generally a win for workers.

“From an employer’s perspective, there’s not a lot of benefits here,” said Kurt M. Graham, a member at Mika Meyers PLC in Grand Rapids. “It’s a positive for employees.

Regardless of how you cut it, many will make more money in terms of overtime pay or higher salary.”

However, part-time workers may be hired to limit overtime costs, Graham said.

Disbrow doesn’t think there will be as many new people getting overtime as the labor department anticipated as employers will adjust to keep labor costs as much the same as possible while following the law.

“It’s a law of unintended consequences,” he said. “I think there are a number of interesting challenges from the final rule for lawyers. They create a number of thorny issues for employers we represent.”

Once someone becomes nonexempt, their hours must be tracked, Disbrow said. This includes work outside the office, such as answering emails via phone. Companies need to implement a policy that employees must follow, he said.

The employees encompassed by the new threshold are not used to having their hours tracked so closely.

“They come in early, they may stay late, they may work from home,” Disbrow said. “That all stops once you reclassify.”

Clients should be advised to examine how much people are working after hours to determine if they should be told to stop or how much it will cost in overtime if the work is deemed necessary, Graham said.

While an opportunity for overtime may be welcome for some employees, a job classification change could be a hit to morale.

Being a salaried employee can be a sign of status where workers feel aligned with management. Those converted to hourly workers will be back to punching a clock.

“A lot of people will see that as a demotion,” Bonnette said.

Graham agreed, saying, “They’re put in a category where they feel they are viewed as less prestigious.”

Employers need to explain why this occurred and give managers consistent talking points while stressing that the classification switch isn’t punitive, Graham said.

The change also creates a situation where two people are side by side doing the same job — with salary varying by experience — but now one will be eligible for overtime while the other won’t, Bonnette said.

“Employers are very concerned about people doing the same job being put in two different classifications,” he said. “That’s where I’m getting most of the questions.”

One strategy in such a situation would be to reclassify one of the positions as senior level, Disbrow said.

If some managers track unauthorized overtime better than others, employees could claim discrimination if they weren’t treated the same, Graham said.

Practitioners point out the salary threshold boost did not come with an adjustment to the duties test.

“If you make $50,000 and you are doing manual labor, you still get overtime,” Bonnette said of the new guidelines.

While December will seemingly come quick for employers scrambling to comply, it could have been much worse. There was talk of a 60-day turnaround, Schwartz said.

“They did provide employers a larger window,” he said. However, lawyers are still telling their clients there’s no sense in waiting.

“Like the Affordable Care Act, it’s better off sooner than later. The regulations will be there,” Schwartz said.

Disbrow added, “It’s a relatively short period to comply.”

Employers have used the Fair Labor Standards Act for too long to avoid paying overtime, said Kathleen L. Bogas of Bogas and Koncius PC in Bingham Farms.

“They have misclassified low earning employees so that they would not have to pay those employees overtime,” she said. “Now, with the annual pay threshold increased, misclassification should not be as large of an issue. More employees will be paid as they should be paid in accordance with the law and not at the whim of someone misclassifying the employee.”

While the increase is less than the rise of inflation since the last adjustment in 2004, it is a “down payment on an overdue promise,” said Bruce A. Miller of Miller Cohen PLC in Detroit.

Employers should be educated about the changes and told to follow the law, Bogas said.

“It makes no sense to drastically change the employer’s workforce by bringing in part-time employees to make up for the removal of overtime pay to other employees,” she said. “They need employees who know what they are doing and can do it efficiently.”

She added that employers must be reminded that they cannot retaliate against those who make FLSA violation claims.

“This may become more prevalent if the employers do not timely act in adjusting pay, duties and/or hours worked,” she said.

As management-side attorneys advise companies on how to limit their overtime liability, employment lawyers “will continue what they have been doing historically,” Miller said.

“The Economic Policy Institute warns that about $50 billion is stolen from employees by the failure of employers to make the proper payments,” he said. “That amount will be increased as a result of these changes. Recovering this earned money is the task of employment lawyers.”

Bogas said she thinks “responsible employers will do the right thing and pay their valued employees in accordance with the law.”

“I certainly hope that employers will not lower the pay of employees and then pay them overtime pay,” she said. “This would likely cause an exodus from that workplace since
overtime is seldom guaranteed.”

An objective system is needed to track employee hours as filling out a timesheet will lead to disagreements about arrival and departure times, Bogas said.

If employers fail to track hours, they will not be able to justify pay decisions, Miller said.

“Where an employee is close to the maximum of $47,476, the employer may raise them above that sum to avoid payment,” he said. “But that still means more money in the employees’ pocket.  If the past is prologue, a large number of employers will just cheat.”

Miller said changing the salary threshold every three years is a “great improvement in the law.”

“Now the changes will be automatic and help maintain purchasing power,” he said.