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June 13, 2016

New OT rules take effect Dec. 1: Here's what you need to know

Photo / Tim Greenway
Photo / Tim Greenway
Tawny Alvarez, associate at Verrill Dana, left, Douglas Currier, partner and chair of the law firm's labor and employment practice, and Joanna Bowers, associate, at the Portland office.

Four options for meeting the federal overtime rules

Douglas P. Currier, a partner at Verrill Dana in Portland, offers four suggestions for how companies can approach the new overtime rule:

1. Raise the salary to $47,476 or higher and keep the employee exempt from overtime

This maintains the exempt status of employees whose duties are truly those of an executive, administrative or professional employee and is most feasible for employees whose salaries are close to the new salary level and who regularly work overtime. The greater the distance between the employee's current salary and the new threshold, Currier says, the less likely that an employer will chose this option.

"We know from what our clients have told us already that many of them aren't going to raise their employees to $47,476," he says. "They're telling us, 'It's not in the budget. It's not an option.' So this isn't going to mean everyone gets a lot more money than they had before."

2. Pay overtime in addition to the employee's current salary when necessary

Employers can continue to pay their newly overtime-eligible employees the same salary, ask them to keep track of their time and pay a time-and-a-half overtime wage if they work more than 40 hours in a given week. This approach may work for employees who work 40 hours or fewer in a typical work week but have occasional spikes requiring overtime that employers can plan for and budget the extra pay during those periods. To determine the OT pay rate, divide the weekly salary by 40 and multiply by 1.5.

3. Evaluate and realign hours and staff workload

Employers have the option of making sure that workload distribution and staffing levels are managed appropriately for their white-collar workers who earn below the new $47,476 salary threshold. In some cases, Currier acknowledges, that analysis might point to the need to hire additional workers.

4. Put the salaried employee on an hourly wage

Currier illustrates this option by supposing an employer has a salaried worker making $40,000 a year and typically working a 50-hour week. That translates to a $770 per week paycheck. If that employer wants to keep the worker's yearly salary and hourly workload the same, he says, they could offer a $14 hourly wage, which at 40 hours translates to $560 in wages. And then, for the additional 10 hours of a typical week, pay a $21 hourly wage at time-and-a-half resulting in an additional $210 in weekly wages. Although this approach keeps the employee's yearly wage the same, Currier acknowledges this option might not go down well with some employees.

Greg Dugal, president and CEO of the Maine Restaurant Association, readily admits the salary threshold for employers to avoid paying overtime when salaried employees work more than 40 hours is too low and needs to be hiked. At $23,660 per year, or $455 per week, the threshold hasn't changed since 2004.

But more than doubling it in one fell swoop to $47,476, or $913 per week, is going too far and too fast for Maine restaurant owners who collectively employ more than 66,000 workers, he says. Add it to a list of concerns business owners face.

"A lot of our members are still reeling from the Affordable Care Act," Dugal says, adding that the upcoming November referendum to raise the minimum wage from $7.50 per hour to $9 is yet another worry for the association's member restaurants. The cumulative impact of all three mandates would pose a significant challenge for Maine restaurants, which account for roughly 11% of employment in the state and $2.2 billion in projected sales in 2016.

"You start ending up in negative territory on your margins," he says.

The U.S. Department of Labor estimates the new OT rule, which takes effect Dec. 1, will automatically extend overtime pay eligibility to 4.2 million workers nationwide. In Maine, anywhere from 16,000 to 64,000 salaried workers could be affected, according to a state-by-state analysis compiled by U.S. Sen. Elizabeth Warren, D.Mass.

Julie Rabinowitz, director of policy, operations and communication for the Maine DOL, says it's difficult to gauge the precise number of salaried workers in Maine that will be affected. The hospitality, restaurant and retail industries could be hardest hit because of Maine's dependence on tourism and their reliance on assistant managers, she says. Nonprofits and startups are also likely to be particularly impacted by the rule.

Four basic options

New overtime rules will sweep broadly across Maine's economy, says Douglas Currier, a partner at Verrill Dana and chairman of the law firm's labor and employment group.

He encourages employers to evaluate all of their salaried employees who are now under the $47,476 threshold and apply a standard "cost-benefit analysis" to each of the four basic ways of meeting the DOL's new rule by Dec. 1. Whatever their decisions, he says, it's critical to communicate openly and frequently with employees about any changes and the reasons behind them.

Step 1 involves determining if the new overtime changes will affect your business: If all employees are hourly and are not specifically exempted, the standard Federal Labor Standards Act overtime requirement of paying at least time-and-a-half for every hour over 40 still applies. Salaried employees who fall between the old and the new OT threshold, on the other hand, will be affected and the employer will have to evaluate how best to meet the new requirements.

Step 2 involves making a plan for compliance. Currier says employers have a wide range of options and that they should choose what works best in balancing the corporate and employee interests.

Morale issues could follow any changes

Simply changing salaried employees to hourly could lead to other issues, says Currier.

"The first question is, 'How will this impact employee morale?'" he says. "I think it's going to be a huge issue for someone to go back to being an hourly employee after they've been an exempt salaried employee, even if the weekly pay remains the same."

The second problem he foresees: Formerly salaried employees who become paid by the hour might reasonably worry about losing pay if the hourly rate and workload combination translates to a smaller paycheck. "They're going to feel as if they are going through a demotion," he says.

"And what does this do for their chance of promotion?" he adds, acknowledging that the status of being a "salaried" employees is typically higher than being simply an "hourly" employee, both internally and externally if that employee decides to move on.

Doing nothing and hoping for the best is not an option that Currier recommends: An employer who fails to meet the new OT regulations and is taken to court risks not only having to pay the plaintiff's claim but also penalties and the legal fees. "More likely than not it is going to go against the employer," he says.

Shift salaried workers to hourly?

Tawny Alvarez, an associate at Verrill Dana and editor of the law firm's labor and employment group's blog, "Taking Care of HR Business," agrees with Currier that communicating with employees is going to be critical as employers evaluate and implement the new OT rules. "You don't want a complete backlash on Dec. 1 when employees who thought they were going to get a raise to $47,476 discover that is not what's going to happen," she says.

Unlike the Affordable Care Act requirements, which don't apply to companies having fewer than 50 full-time employees, Alvarez says the new OT rules apply to all employers regardless of the company's size. "If you have just one employee who's salaried and the salary is below the new $47,476 threshold, this affects you," she says.

There are other things to consider in addition to the potential morale problem resulting from turning salaried employees into hourly employees: Alvarez says many employers have different benefit packages and incentives for exempt salaried employees compared with workers who are paid hourly wages.

Other issues that might arise if formerly exempt salaried employees are designated as hourly employees, she says, including having them keep track of their lunch and break times; determining how to pay for travel time; keeping track of work-related cell phone conversations that might occur during off-hours; and figuring out how to compensate for on-call time that might be required for some employees on weekends or outside of normal working hours.

"All these are difficult issues for an employer to figure out," says Alvarez. "Suddenly, you have all these exempt salaried employees who are now non-exempt hourly employees. Now you need to make sure everyone knows what an 'hour's work' means. A lot of things you didn't have to worry about before will have to be addressed. You have to decide what you want to do regarding these problems. Managers will need training — for example, when people can take a break."

Retail sector challenged

Dugal says the average salary for Maine restaurant managers is $40,000. But there are significant differences depending on the part of the state where those managers actually work, he says, with restaurants in western, northern and far Downeast Maine paying on average $30,000 to $35,000, while a "small cadre in Portland" and southern Maine might be paying closer to the new $47,476 overtime threshold.

"Getting someone from $40,000 to $47,476 is a serious challenge," he says, adding that getting someone who's in the $30,000 to $35,000 range up to that level is probably impossible for most restaurant owners.

Dugal also serves as CEO and president of the Maine Innkeepers Association, another important leg of Maine's hospitality and tourism industry, which employs another 15,000 to 17,000 workers at roughly 500 lodging establishments throughout the state. Those members have similar concerns about the new OT rules, he says, largely because they also have tight margins, experience seasonal shifts in workload and have front-line managers who sometimes step in and do the same work as the people they supervise.

Curtis Picard, executive director of the Retail Association of Maine, says Maine's retail sector employs roughly 90,000 workers, with 70% being employed by the association's 350 members that tend to be the larger retail stores in the state.

"Retail is not a Monday-through-Friday, 9 a.m. to 5 p.m., kind of business," he says. "Most are open seven days a week and put in a 12-hour day or more. So, you're looking at a 60-plus-hour typical work week."

Picard says Maine retailers typically manage those challenges with a mix of full- and part-time hourly and salaried employees. The option of putting a longtime salaried employee back on an hourly wage is not something they want to do, he says. But many of those retailers also don't have the leeway to raise the salaries up to the $47,476 threshold to keep those full-time employees exempt.

"Nobody has talked much about the automatic increase that takes place every three years," he adds, noting that for a small rural state like Maine, increases tied to a national benchmark will make the OT threshold an even more unreasonable burden for employers to bear going forward.

Although he's aware that there are nullification bills moving through both the U.S. House and Senate, Picard isn't counting on the new OT rule being tossed out — at least during the Obama administration.

"I'm pretty much a realist," he says. "The president is very committed to the Department of Labor's rule. It will take a two-thirds vote in both the House and Senate to override a veto. Getting that two-thirds is a pretty tall order."

"I certainly wouldn't count on a legislative fix," agrees Joanna Bowers, a Verrill Dana associate who works in the firm's labor and employment group. "We want employers to be ready for this."

Read more

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LePage joins coalition lawsuit against overtime rules

Small business group supports raising state's minimum wage

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