In just over two weeks, on December 1, the new U.S. Department of Labor (DOL) overtime rule is set to go into effect. And while legal challenges from 21 states and President-elect Donald Trump could possibly delay implementation or enactment of the rule, business owners, including retailers, should be prepared to pay time-and-a-half to any employee who makes less than $47,476 per year or $913 per week for any hours worked beyond the 40-hour-per-week threshold. The rule more than doubles the previous threshold for overtime exemption. The rule also sets automatic increases every three years based on the cost of living.
While it is unlikely that anything will stop the overtime rule from going into effect as of the first of December, 21 states, led by Nevada and Texas, and the U.S. Chamber of Commerce each filed legal challenges to the law. In mid-October, a federal judge in Texas agreed to consolidate the two challenges, as reported by the Society for Human Resource Management. The legal effort is seeking to bar the overtime rule and, importantly, the groups argue, to stop the automatic increases that are scheduled to occur every three years, as reported by Forbes.com.
It is possible that the election of Donald Trump might help those looking to bar the overtime rule. Prior to the election, David French, senior vice president of government relations for the National Retail Federation (NRF), and Evan Armstrong, vice president of government affairs for the Retail Industry Leaders Association (RILA), told Bloomberg BNA that their organizations would look to meet with the Trump Administration’s Labor Department transition team.
The article reported that RILA is most concerned about the triennial updates. NRF would not provide details on how it wants the overtime rule changed. French did note that while “a lot of large employers are fairly far along [in complying with the rule], the information gulf for small employers is massive, and I don’t think the DOL has focused on that. We’ve got an impending crisis that’s going to hit right after the election.” Trump has discussed the potential for a small-business carveout, BNA noted.
However, in a more recent article, Forbes.com wrote that it might be difficult for President-elect Trump’s administration to do much about the new rule since it goes into effect on December 1, more than a month before Trump takes office. The article pointed out that he could try and rescind the rule, but this would mean employers might tell workers that they’re getting a pay cut. He could also try to modify it by eliminating the automatic cost-of-living increases or by passing a new law that specifies the overtime rule should be determined by job duties and not pay level, Forbes.com reported.
Considering the impact that the rule may have on member stores, the American Booksellers Association is republishing the following information on the new regulations and the workers they apply to, as well as suggestions from small business experts on ways to respond to the rule in the management of their stores. This information was first published in Bookselling This Week on September 6, 2016.
The New Rule
According to the White House, the new overtime regulations “will automatically extend overtime pay protections to over four million workers within the first year of implementation.” Aside from increasing the salaries of millions of workers, the rule also looks to “modernize and simplify the regulations.” The rule also establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain levels at the 40th percentile of earnings for full-time salaried workers in the lowest-wage Census region.
While the DOL says this will extend overtime pay protections to more than four million workers, the Economic Policy Institute (which provides a fact sheet — and a fairly optimistic overview —- on the new overtime rule) believes that number to be closer to 12.5 million because EPI includes workers who were misclassified by employers that were seeking to avoid paying overtime, as reported by Fast Company. This is because previous rules exempted “high-level” workers from overtime. The new rule clarifies which workers qualify for an exemption and states that any worker who makes less than $47,476 per year or $913 per week is eligible for overtime if they work more than 40 hours per week, regardless of job title or description.
The DOL notes that the Fair Labor Standards Act (FLSA), under which the overtime pay protection rule falls, covers employees of enterprises that have an “annual gross volume of sales made, or business done,” of $500,000 or more. In addition, employees of certain entities are covered by the FLSA regardless of the gross volume of sales or business done. These entities include: hospitals; businesses providing medical or nursing care for residents; schools (whether operated for profit or not for profit); and public agencies.
The DOL stresses that, even if a business is not covered under the FLSA, employees may be individually covered by the FLSA if their work regularly involves them in commerce between states. The FLSA covers individual workers who are “engaged in commerce or in the production of goods for commerce.” See Fact Sheet 14: Coverage Under the Fair Labor Standards Act (FLSA).
According to Fact Sheet 14, examples of employees who are involved in interstate commerce include those who:
- Produce goods (such as a worker assembling components in a factory or a secretary typing letters in an office) that will be sent out of state;
- Regularly make telephone calls to persons located in other states;
- Handle records of interstate transactions;
- Travel to other states on their jobs, or
- Do janitorial work in buildings where goods are produced for shipment outside the state.
Bookstore owners who are unclear as to whether the above descriptions apply to their business should contact the Department of Labor at 1-866-4USWAGE (1-866-487-9243).
Which Workers Are Protected Under the New Rule?
While most workers who make more than the $913 per week threshold will not qualify for overtime pay, a business owner should not simply assume this to be the case. Some workers making up to $134,000 per year will be eligible for overtime if they do not meet the requirements to be exempted from overtime pay protections.
According to a DOL FAQ, to qualify for exemption from overtime pay protections, a worker must meet ALL of the following requirements:
- Be salaried, “meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed,” what DOL calls its “salary basis test”;
- Be paid more than a specified weekly salary level of $913 per week [or $47,476 annually for a full-year worker], what DOL calls its “salary level test”; AND
- Primarily perform executive, administrative, or professional duties as defined in the DOL’s regulations, which DOL calls its “duties test.”
It is important to note that DOL information on the final rule currently lists the weekly salary threshold as $455 per week. This is because the threshold will not increase to $913 until December 1, 2016.
Who Is Exempt?
If a worker is making more than $913 per week, a business must still determine if he or she is exempt from overtime pay protections. And, again, it is important to note, if a worker earns less than the threshold salary of $913 per week, they are automatically eligible for overtime pay.
The DOL spells out the qualifications for exemption in its Fact Sheet #17A, which notes:
To qualify for the executive employee exemption, all of the following tests must be met:
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.
To qualify for the administrative employee exemption, all of the following tests must be met:
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
To qualify for the learned professional employee exemption, all of the following tests must be met:
- The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; and
- The advanced knowledge must be in a field of science or learning, and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
To qualify for the creative professional employee exemption, the following test must be met:
- The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
How Should a Small Business Respond?
Many business experts advise small-business owners to first create a list of employees who will be covered under the new rule and those who are exempt. If a worker makes less than the salary threshold, then any hours worked over 40 per week must be paid at time-and-a-half.
Earlier this summer, Business News Daily (BND) published the article “What You Need to Know About the New Federal Overtime Rules” to provide business owners with suggestions on how to tackle the new overtime rules.
BND noted that the “obvious answer” on how to handle the new rule is to simply make sure your overtime-pay-eligible employees do not work any overtime. Conversely, a business could decide to continue the same way as before and simply pay time-and-a-half for overtime when it occurs. The third option is to increase workers’ salaries to $913 per week, which in most cases will exempt them from overtime protections.
David Reid, CEO of the human resources and benefits company EaseCentral, told BND he believes many small businesses will convert salaried employees to hourly wages due to the rule change. While this may seem counterintuitive, Reid explained that small business owners could do this to keep an employee’s annual overtime wages below the difference between the new threshold of $47,476 and the worker’s previous salary.
“If you’ll have them work additional hours, pay raises are going to come more in the form of overtime in these small businesses,” Reid told BND. “I don’t think the mentality of the small business owner is to give somebody a raise over the cap. I think they’re going to sit back and realize that what used to not be additional pay for additional time at work will now be overtime pay, and that will be used in lieu of giving a pay raise.”
Meanwhile, in USA Today, small-business expert Rhonda Abrams provides five strategies to help small businesses cope with the new overtime rule. They are:
- Keep salaries the same, eliminate or reduce overtime. Be sure to monitor activity and hours to limit overtime.
- Raise salaries to the new minimum, enabling your business to require unpaid overtime of qualified employees.
- Keep salaries the same, pay overtime. This is financially beneficial if overtime is limited or irregular and current pay is at the low end of the present minimum. Be careful tracking employees’ hours.
- Lower wages and pay overtime. This results in your expenses staying the same, but will certainly create disgruntled employees and high turnover.
- Hire more employees. If you regularly require a lot of overtime from current employees, you may want to consider hiring additional hourly workers to pick up the extra hours.
Overall, “the new overtime rules are creating havoc for employers everywhere,” Dr. John Sherlock, the director of the Master of Science in Human Resources Program at Western Carolina University, told BTW via e-mail. Though no best practices have emerged yet for how it’s best for employers to respond, he said, “as a professor of human resources, I’m a big fan of the [information available from] Society for Human Resource Management (SHRM).”
For more details on whether or not an employee is exempt from the overtime rules, the DOL provides comprehensive fact sheets for each category of worker. These include:
- Executive Fact Sheet
- Administrative Fact Sheet
- Professional Fact Sheet
- Computer Professional Fact Sheet
- Outside Sales Fact Sheet
- Salary Basis Requirement
Booksellers who have further questions are encouraged to contact ABA Senior Public Policy Analyst David Grogan at (800) 637-0037, ext. 7562 or via e-mail at [email protected]. More information can also be found at the DOL Wage and Hour Division website, wagehour.dol.gov, or via the DOL toll-free information helpline, 1-866-4USWAGE (1-866-487-9243).
When state laws differ from the federal FLSA, an employer must comply with the standard most protective of employees. Links to state labor departments can be found here.
For suggestions and best practices on how to handle the new DOL rule, BTW suggests the following:
- Learning How to Keep Staff at 40 Hours Per Week, Fast Company, October 18, 2016
- New Overtime Rule Announced: Learn how it may impact your business, Webinar, Paychex HR
- Are You Ready for the Department of Labor’s Overtime Rule Change?, Business News Daily, October 24, 2016