A major change in the way employers calculate overtime pay for salaried workers that was to take effect Dec. 1 was blocked last week by a federal judge in Texas, adding confusion and uncertainty to an already contentious issue for many companies.
The new regulation, which would have made more than four million employees eligible for extra pay when working more than 40 hours a week, proposed to raise the salary threshold at which workers are exempt from overtime pay from $23,660 annually to $47,476 a year. The rule was successfully challenged by more than 20 states and multiple business organizations, including the U.S. Chamber of Commerce, which all argued that the changes were too costly and required Congressional approval.
4 million: Estimated number of American workers who would be affected by the rule change
Now companies—particularly retail, hotel, restaurant, and nonprofits which are most affected by the proposed change—are wondering what to do in light of the decision by a federal judge in Texas to block the implementation. Since the U.S. Department of Labor called for the change six months ago, many companies revised payroll policies, converted salaried workers to hourly employees, and even promised raises to put workers outside the exemption cap to avoid paying them overtime.
So, now what? To help sort it all out, we checked in with John McKelway, a partner in the Labor and Employment Group at Boston’s McCarter & English.
I guess the first question is, ‘What happened?’ Doesn’t the U.S. Department of Labor have the right to make a change like this?
That’s exactly the issue. Can the labor department make this change through its rule-making function, or should a change of this magnitude be left to Congress? There are other aspects that have been challenged, and one is that the change really created a de facto salary test for the exemption and whether it should be the business of Congress to determine that.
$23,660: The current annual salary threshold an employee must earn to qualify as exempt from overtime.
What are you hearing from your clients?
Things are exploding, and about all I can tell them at this point is that the world isn’t going to end. But that’s almost all we know for certain at the moment. The timing of this is really extraordinary. The December 1 date has been known for a long time. The rule-making process that put these changes into effect was started years ago. The date for implementation was chosen because it was after the election, before a new president, and before the new Congress meets for the first time. We knew there was going to be a court decision on the challenge but few thought it would be a broad, sweeping injunction, which is exactly what happened.
How have clients responded to the rule change?
Some have bitten the bullet and granted raises to put the workers outside the threshold. It’s going to be extremely difficult for those companies that have promised significant raises to take them off the table after they promised them. Many clients are converting employees from exempt to non-exempt, either paying them hourly or continuing to pay them a salary, but paying overtime if they went over 40 hours a week. Very few companies have done nothing because of payroll schedules, and the need to communicate with workers and update software and policies and so forth. So most of the changes had been announced, and on the Wednesday before Thanksgiving everything’s been thrown into confusion.
$47,476: The proposed annual salary threshold an employee must earn to qualify as exempt from overtime.
So the big question: If you’re an employer, what do you do now?
I have to give different advice to different clients, but I would say if you were going to raise the salaries on December 1, and haven’t already promised them, then I would consider holding off on doing that. If you were going to convert salaried workers to hourly, that should probably be delayed as well because you don’t have to do that anymore. So, if you can, it’s probably best to freeze things the way they are or preserve the status quo until we get a better picture of what’s going to happen.
Any guess on what will happen?
There are so many moving parts. There’s litigation. Whatever is finally determined will likely face another court challenge. Secondly, there’s the agency rule-making process itself and a new Department of Labor head appointed by President [elect] Trump may take a different policy approach. The new president himself could issue executive orders or encourage the DOL to take a particular stance. And then, of course, Congress might make new laws affecting the rules. But, regardless of what happens, I think there will be changes. The question is, what will the Trump administration and new Congress do?
21: Number of states that argued the rule was unlawful
It sounds like you believe some change in salaried overtime rules is warranted, nevertheless.
Well, in some industries and some positions, the threshold is so low it has really been a hardship. Imagine some employees who work 60-70 hours a week and don’t get overtime. And we’re talking $23,000 a year as the cap. So many feel an adjustment needed to be made because some employees were toiling long hours without benefit of overtime and not being reasonably compensated.
On the employer side, these changes would hit certain industries really, really hard. Especially nonprofits, educational institutions, start-up companies, and retail and hospitality businesses. They have been paying employees in management positions lower rates because of their financial constraints, and many employees were okay with that. It gave them flexible work schedules and they felt they were making contributions because of the nature of the work they performed and they were managers. So there were other things that balanced the fact they weren’t making a lot of money. Suddenly moving these people from salaried employees to hourly workers could have a real negative effect on morale.
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