Changing overtime rules pose big questions for employers

The new overtime regulations set to take effect Dec. 1 will affect an estimated 4.2 million white-collar workers across the country. Employers are assessing their options, and managers will probably need to make changes, either raising salaries or reclassifying workers to comply with wage and hour laws.

These choices will all have consequences, some of which may not be anticipated or intended by the new labor regulations.

The Labor Department's new rules double the minimum salary for exempt salaried workers to $913 per week, or $47,476 per year. For many employers, this change could have a dramatic impact on pay structures and potential labor costs — if they elect to increase existing salaries in order to meet the new regulatory standard.

Of course, employers may also choose to reclassify existing jobs that are compensated below the new threshold to nonexempt, overtime-eligible hourly status. This particular decision, and how employers implement this change, is likely to affect the extent to which the rule actually results in an increase in employees' take-home pay.

First and foremost, the financial consequences of a change in employee classification will depend on how the employer calculates a formerly salaried employee's new hourly rate of pay. For example, an employer may build a certain number of overtime hours into existing weekly compensation when reducing that salary to an hourly wage. For instance, if an employee typically works 50 hours a week and receives a salary of $750, the employer's labor costs are held neutral if the employee is employed at an hourly rate of $13.64. There is no presumption under the Fair Labor Standards Act (FLSA) that an exempt employee's salary represents compensation for 40 hours in a workweek. Exempt employees are paid a salary for the jobs they perform, not the hours they work. Employers are only constrained by the minimum- wage laws when determining the rates at which they will pay their employees on an hourly basis.

Alternatively, an employer may choose to control its costs by placing strict limits on the overtime hours it permits employees to work. Employer controls on overtime hours are entirely consistent with and encouraged by the FLSA. Overtime hours are expensive and inefficient; when the act was passed into law in 1938, the overtime requirement's primary purpose was to increase employment by discouraging employers from requiring work in excess of 40 hours per week. If additional work must be performed, increased overtime costs should motivate the employer to hire more employees. If an employer prohibits its employees from working overtime, there is obviously no guarantee that the rule change will result in bigger paychecks for reclassified employees.

There are additional consequences associated with reclassifying employees from exempt, salaried status to hourly, overtime-eligible positions. Some employees associate salaried status with a certain level of career or professional achievement. Reclassification to nonexempt status may feel like a demotion. When considering reclassification as a compliance option, therefore, employers must consider and address the impact of such a change on employee morale and organizational hierarchies.

Employers assume additional record-keeping obligations with respect to their nonexempt workforce, including the requirement that all hours worked are accurately recorded, in order to ensure that nonexempt employees are properly paid. As the use of technology has blurred the lines that separate work from personal time, however, employers have been challenged in their efforts to ensure that timekeeping systems capture all hours worked, including the time employees may spend responding to e-mail on their iPhone at home, or using remote access capabilities on their laptop at a coffee shop. The dramatic increase in wage and hour litigation over the past decade has also sharpened most employers' attention with respect to their record-keeping obligations, and the need to strictly prohibit employees from engaging in "off-the-clock" work.

The reclassification of a previously mobile, remotely engaged knowledge worker to an hourly role may have real consequences with respect to how, when and where the employee is permitted to perform his or her job. The need to punch the clock every time an employee engages in work-related activity cannot be easily met when the employee is accustomed to working anywhere, anytime. At the very least, both employers and employees will need to agree on rules that determine when overtime is permitted, how approval to work overtime is obtained, and how to record and report those hours once they are worked.

All of these strategic choices must be considered on a timetable that most likely falls outside of employers' budget cycles. Current salary levels and compensation plans for all exempt employees must be examined. If employees are reclassified to overtime-eligible status, employers must also determine how new hourly rates will be calculated, and how to effectively explain that calculation; revise or update current timekeeping programs and policies to reflect the changes, including potential changes in duties or responsibilities now that employees will be paid by the hour; and communicate these new compliance responsibilities to both managers and employees. All of these choices will have consequences, both obvious and unanticipated. The clock is ticking.

Andrew J. Voss, is office managing shareholder of the Minneapolis office of Littler Mendelson. He can be reached at (612) 313-7605 or avoss@littler.com.