03/25/2014
Changes in overtime pay rules could have 'big effect on employers,' especially in Midwest
It's not just about assistant managers who flip burgers.
Changes in overtime pay rules could have 'big effect on employers,' especially in Midwest
Jerrod Combs recently switched from hourly wages to a salary at Sun Valley Landscaping, meaning a steady paycheck but no overtime pay. Combs may have to keep track of his hours again starting in 2015 or 2016 if rules about overtime pay change and encompass larger numbers of employees. Here, Combs works with a skid loader at the Sun Valley operation in Sarpy County.
It's not just about assistant managers who flip burgers.
Coming changes in federal pay rules apparently would mean overtime pay for large numbers of white-collar workers, many of them with supervisory, administrative or professional duties.
One early proposal would require overtime pay for every salaried or hourly worker making less than $50,440 a year. Such a rule would hit businesses especially hard in the Midwest, where average wages are relatively low.
“The increase in the salary limit is going to have a big effect on employers,” said Allison D. Balus, an attorney with the Baird Holm law firm in Omaha who works on labor issues. “A lot of their currently exempt employees are going to drop below that limit. It will require a lot of retooling.”
Take Jerrod Combs, who recently switched from hourly wages to a salary at Sun Valley Landscaping in Sarpy County. He figures he'll keep working 50 to 55 hours a week during the company's busy season, which is just starting, but this year receive no overtime pay.
For the past six years, he saved up his hourly and overtime wages to tide his family over during the winter, when his income depended on snow removal. Some years his paycheck ended in November and didn't resume until April.
But late last year, his boss called him in with some good news.
“He said, 'You're on salary now. It's a promotion.' I said, 'Cool.' It made me happy. It took a lot of stress off my shoulders,” said Combs, who is now in charge of the company's landscaping crews. “This way, I don't run out of money during the wintertime.”
Combs may have to keep track of his hours again starting in 2015 or 2016, even though he could remain on salary as a supervisor.
This month, President Barack Obama told Labor Secretary Tom Perez to consult with workers and businesses and rewrite federal rules to increase the number of Americans who qualify for overtime pay under the Fair Labor Standards Act.
There are two ways to do that: Raise the income threshold for those who must receive overtime pay, currently $455 a week, or $23,660 a year, and narrow the definitions of managers, administrators and professionals who are exempt from overtime.
Obama may do both, but the income threshold could have the biggest impact. Anyone making less must be paid overtime for work beyond 40 hours a week, regardless of their duties.
Perez's staff will come up with proposed rules, take comments, hold a hearing and send the final rules to Obama sometime next year.
The president has resolved to use “my pen” to take actions that don't require congressional approval. Previous presidents, including Gerald Ford and George W. Bush, also revised overtime rules during their terms.
The overtime review is part of Obama's effort to draw attention to the disparity between low-wage workers and high-salaried executives, which could be a campaign issue this year.
Ross Eisenbrey, vice president at the liberal-leaning Economic Policy Institute in Washington, D.C., recommended the threshold be set at $970 a week, or $50,440 a year, with an automatic annual adjustment for inflation. It would make between 5 million and 10 million more people eligible for overtime pay.
“It's a very modest amount in the sense that wages should be higher because the nation is wealthier,” Eisenbrey said. “Executive pay certainly has taken off since then.”
The figure, which has received some national attention, comes from adjusting for inflation the limit set during Ford's administration in 1975.
“I think that's high,” said Omaha attorney Patrick Barrett of the Baird Holm firm. He expects the Labor Department to raise the $23,660 threshold (“That's hardly an indicator of somebody who's an executive”) but not as high as $50,000.
Barrett said the Obama administration also is likely to tighten the rules on who should be exempt from overtime by setting a percentage of time that a person would have to spend actually managing.
Terry Simanek Kohles, vice president of the Integrity Staffing and Solutions consulting firm in Omaha, said raising the threshold to $40,000 or $50,000 “would have a tremendous impact” because many businesses pay managers in the $30,000-to-$40,000 range and expect long work hours.
“They're really going to suffer,” she said, because many can't afford to hire more people or pay more overtime.
Many managers of small businesses work long hours for low pay with the hope they will be rewarded eventually if the business succeeds, she said, and if their work hours are restricted because the company couldn't afford overtime pay, that growth might not happen.
Balus said making more people eligible for overtime has pluses and minuses. “At some point the company has to make a profit, and if the cost of doing business gets too high it has to pass the cost on to the consumer. But you also could have people making more money, more people with jobs, and that helps the economy, too.”
Formal overtime pay began with the Fair Labor Standards Act, passed in 1938, which established a 44-hour workweek, later reduced to 40 hours. Overtime encouraged employers to hire more people, reducing the number of “job hogs” who piled up extra hours of work while others were unemployed.
Then, as now, one goal of the overtime rule is to reduce unemployment. The expense of overtime pay gives employers an incentive to hire more workers.
The income threshold is intended to protect workers from being improperly exempted from overtime pay. If you make less, it's considered proof that you aren't important enough to have bargaining power over wages and working conditions, and you need “overtime protection.”
The income threshold was set at $455 in 2004 and since has slid below the federal poverty level for a family of four.
“If you have to work more, you should get paid more. ... It's just fair,” Obama said as he assigned the rule-making to Perez. “It's just the right thing to do. If you're working hard, you're barely making ends meet, you should be paid overtime, period.”
Balus, the Omaha attorney, said employers have gotten more “flexibility” in managers' hours in recent years because the 2004 rules on who's exempt are “amorphous.”
“Part of it depends on the court one is in front of and how they interpret that,” she said. “A lot of it has to do with how much discretion the employee has. What are the specific tasks the employee is doing? Sometimes employers create positions expecting them to do one thing, and they end up doing something else.”
That doesn't mean a manager can't pitch in on a job that needs doing, Balus said.
A convenience store manager can still mop the floor or fill in at the cash register as long as he has managerial duties such as hiring and firing, setting store hours, ordering products and reporting on finances.
“He's still running the store and making decisions,” she said. “It's where his authority is.”
But an assistant store manager with no real authority should be paid overtime even if she or he is on a salary above the threshold, Balus said. If that level is raised, more people will be counting their hours.
Those employees won't necessarily have to shift to hourly status, but they will have to start keeping track of their hours and be paid time-and-a-half for hours they work beyond 40 per week, a standard that will hit the Midwest especially hard.
Nonfarm, private-industry workers averaged $38,000 a year in Iowa and $37,200 in Nebraska last year, compared with about $49,000 in New York and in California, according to the U.S. Bureau of Labor Statistics.
Eisenbrey, from the Economic Policy Institute, said the problem is that “people earning poverty wages are denied overtime pay. It's clear to everybody that something's wrong, and that's were we are now.”
Employers that end up with higher labor costs would have many choices, he said, including raising prices, accepting lower profits and paying top executives less.
“The companies right now are sitting on billions of dollars of cash reserves,” he said. “I think they're in no position to say they can't afford this.”
At Jerrod Combs' company, Sun Valley Landscaping, all eight salaried supervisors make less than $50,000 a year and work more than 40 hours during busy weeks, said partner Paul Fraynd. Paying them overtime “would have a major effect on our business,” he said. “We'd have to restructure and have more control on their hours. I don't think some of these jobs could be done in 40 hours.”
He sees the possibility of overtime pay as slowing the company's growth by raising costs, putting services out of reach of some clients.
“My partner and I, we're just regular people,” Fraynd said. “We're taking a lot of risk and kind of driving the economy. It's not all about the money. We're creating 30 jobs for other people, and it's the pride of having our own business.
“The more rules they have, the more difficult it is to start and maintain a business,” Fraynd said. “I don't see how the costs would not go up, either with more salaried people or more overtime.”
He would like the rules to stay the same. “It seems like it would be better off unmeddled-with.”
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Overtime: Who's exempt today
Under the Fair Labor Standards Act, the secretary of labor determines the rules for exempting certain executive, administrative, professional and outside sales employees and some computer-related occupations, based on the specifics of each job.
In general, exempt employees must be paid at least $455 a week and perform work that falls into at least one of these categories:
>> Is directly related to the management of the business or operations of the employer or the employer's clients.
>> Requires specialized academic training in a profession.
>> Is in the computer field.
>> Is making sales away from his or her employer's place of business.
>> Is in a recognized field of artistic or creative endeavor.
Each category has rules. For example, administrators' “primary duty” must be office or non-manual work directly related to the management or general business operations of the employer or the employer's customers and must include “the exercise of discretion and independent judgment with respect to matters of significance.”
“ 'Primary duty' means the principal, main, major or most important duty that the employee performs ... based on all the facts in a particular case, with the major emphasis on the character of the employee's job as a whole.”
Paying weekly wages less than the $455 “threshold” is considered proof that an employee doesn't have bargaining power over wages and working conditions, and needs overtime protection.
How the rules are enforced
Department of Labor investigators respond to complaints about wage violations and initiate investigations. Employees also have hired attorneys to pursue lawsuits against employers, including some class-action cases involving large numbers of workers.
What's being proposed
The labor secretary is reviewing the definitions for who is exempt from overtime pay and the $455 weekly income “threshold” for required overtime pay.
The proposal likely will raise the income threshold and could, for example, set a minimum percentage of a manager's time that must be spent on managerial work.
Proposed rules will be published sometime later this year, followed by a public comment period and a hearing. A final rule will be sent to President Barack Obama next year. Congressional approval is not required.
The rules likely would go into effect in 2015 or 2016.
Sources: U.S. Department of Labor, interviews
Overtime: Who's exempt today
Under the Fair Labor Standards Act, the secretary of labor determines the rules for exempting certain executive, administrative, professional and outside sales employees and some computer-related occupations, based on the specifics of each job.
In general, exempt employees must be paid at least $455 a week and perform work that falls into at least one of these categories:
>> Is directly related to the management of the business or operations of the employer or the employer's clients.
>> Requires specialized academic training in a profession.
>> Is in the computer field.
>> Is making sales away from his or her employer's place of business.
>> Is in a recognized field of artistic or creative endeavor.
Each category has rules. For example, administrators' “primary duty” must be office or non-manual work directly related to the management or general business operations of the employer or the employer's customers and must include “the exercise of discretion and independent judgment with respect to matters of significance.”
“ 'Primary duty' means the principal, main, major or most important duty that the employee performs ... based on all the facts in a particular case, with the major emphasis on the character of the employee's job as a whole.”
Paying weekly wages less than the $455 “threshold” is considered proof that an employee doesn't have bargaining power over wages and working conditions, and needs overtime protection.
How the rules are enforced
Department of Labor investigators respond to complaints about wage violations and initiate investigations. Employees also have hired attorneys to pursue lawsuits against employers, including some class-action cases involving large numbers of workers.
What's being proposed
The labor secretary is reviewing the definitions for who is exempt from overtime pay and the $455 weekly income “threshold” for required overtime pay.
The proposal likely will raise the income threshold and could, for example, set a minimum percentage of a manager's time that must be spent on managerial work.
Proposed rules will be published sometime later this year, followed by a public comment period and a hearing. A final rule will be sent to President Barack Obama next year. Congressional approval is not required.
The rules likely would go into effect in 2015 or 2016.
Sources: U.S. Department of Labor, interviews
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