By Robert Teachout, SHRM-SCP
Sep 28, 2016 - SHRM
As the Dec. 1 effective date for the new overtime
salary threshold rapidly approaches, the National Federation of Independent
Business (NFIB) says millions of small businesses are unprepared. Stating that
small businesses need more time to implement the changes, the NFIB filed a
petition with the U.S. Department of Labor (DOL) to delay the start date by six
months, until June 1, 2017. The NFIB is a small business advocacy
organization representing about 325,000 independent U.S. business
owners.
According to the NFIB's petition, 68 percent of U.S. businesses have fewer than 10 employees, and 39 percent have annual receipts of less than $250,000. While they may not be subject to the Fair Labor Standards Act's enterprise coverage—which kicks in at annual revenue of $500,000—individual coverage may apply if the employees are engaged in interstate commerce.
The changes required by the doubling of the overtime exemption salary threshold, from the current $23,660 per year to $47,476, are particularly challenging. "In many cases, small businesses must reorganize their workforces and implement new systems for tracking hours, record-keeping and reporting," according to NFIB President and CEO Juanita Duggan.
The NFIB emphasized the differences in resources and capabilities between large businesses and the small businesses in its petition. "Large corporations with legal, financial, and personnel departments that have lawyers, accountants and human resource specialists … who command substantial resources for analyzing the legal status of employees and making adjustments to timekeeping and payroll systems, may prove able to cope with the new final rule," the petition stated. "But the department cannot reasonably expect America's small businesses to match them."
In response to the petition, Wage and Hour Division Administrator David Weil said, "The Dec. 1 implementation date is a sufficient amount of time (more than six months) for employers to adjust to the new salary level." He noted that the 190 days provided by DOL was more than three times what is legally required.
Payroll Tax Firm Seeks to Balance Unbalanced Work Hours
Small business owners and HR professionals working in small organizations say that they are facing challenges that will make it difficult to meet the deadline.
Albert Macre, CPA, is a partner at Payroll+ Services in Stuebenville, Ohio, and handles the company's HR responsibilities. Payroll+ has three employees who, Macre said, are paid a salary above the current threshold but well below the new amount. They will be changed from exempt to nonexempt.
Two months of each quarter, the typical workweek is only 30 to 35 hours, but the month when the employees calculate payroll tax requires the staff to work substantial overtime. "I estimate that the roughly 600 hours of overtime our employees work each year are offset by the less-than-40-hour weeks they work during the slow months," Macre said. "Our employees appreciate the certainty of their salary-based take-home pay each period."
Macre is still trying to structure the work hours to allow employees to be paid enough during the slow months to meet their needs and still be able to afford to pay them for the overtime hours necessary during the busy months.
One option Macre is considering is shifting some of the health care benefit costs to the employees. The company has always paid 100 percent of employee health care insurance. For cash flow reasons, "We are contemplating—for the first time in over 20 years—requiring employees to bear a share of the cost of their health insurance benefits," he said. But it is not an option he likes.
Retail Store Struggles with Costs and Scheduling
Kathy Dalby is the CEO and a partner of Pacers Running, a specialty retail store headquartered in Arlington, Va., with approximately 50 to 60 employees, including part-time workers. She has responsibility for compensation and budgets and has responsibility for determining the direction the company will take to comply with the new overtime rule.
"This forced us to relook at our structure and determine our essentials and nonessentials," she said. "Our first thought was 'Who can we afford to keep?' It sounds awful."
Dalby said that her company—and retail stores generally—have very low revenues compared to costs. So she is having to look at the entire scope of business to figure out how to shave costs. "Marketing? Use contractors? Have more part-time employees or go with mostly full-time? We have a lot of assistant managers and floor staff and would like to pay them more, but our margins are razor thin." She hasn't decided yet what approach to take.
Dalby also noted that the required changes not only will hurt the company but also will harm her employees. She said that employees who already are paid above the new threshold will have to work a lot more hours and pick up the slack for employees who are transitioned to nonexempt hourly status. The same amount of work still has to be done.
Employees will have less flexibility, because work hours will have to be tracked carefully and properly recorded. Those going to nonexempt status also will lose benefits that the company offers only to exempt employees. "They will have less opportunity and will leave, resulting in more turnover," Dalby said.
Nonprofit Faces Cultural Shift
It isn't just compliance that makes the overtime changes difficult, noted Deron Lehman, SHRM-SCP, HR director of a nonprofit research center in Arlington, Va. The center has 147 employees in a wide range of exempt and nonexempt roles and uses a performance-based compensation system.
The biggest challenge for the center's employees, according to Lehman, will be the cultural aspects of going from being exempt to nonexempt. "Being exempt is viewed as more professional and more performance-based, instead of hour- and time-based," he said, adding, "There is less flexibility."
Lehman said that the decisions already have been made about which employees will become nonexempt. "We are going to have people start tracking work time at the start of November so that they will be familiar with the process when the new regulations take effect."
Small Businesses Say Not Enough Time
"We're not ready," Dalby said. "This kind of crept up on us, because in retail we are so busy doing all the other things needed to run the business," she said. "We need more time to think about what we need to do. Our first inclination was to cut, and that's not what we really want to do."
Although Lehman thinks the center is for the most part prepared, he said that having more time would be beneficial for his employees who are transitioning to nonexempt status. "Employees need time to adjust to a new way of thinking and to internalize the facts," he said.
Duggan was critical of DOL's resistance to even considering a delay to implementation. Small businesses "can't just flip a switch and be in compliance," she stated. "This is a very costly regulation that is made more damaging by the arbitrary deadline."
Fight over Overtime Rule Continues
The NFIB says it still opposes the new overtime rule and its petition for a delay in implementation shouldn't be construed as support for or acquiescence to the rule. The NFIB is among a group of plaintiffs in one of two court cases filed in federal court challenging the overtime rule.
The organization also supports new congressional legislation seeking to delay the rule's start date. Rep. Tim Walberg, R-Mich., introduced the Regulatory Relief for Small Businesses, Schools and Nonprofits Act (H.R. 6094) on Sept. 21. The bill would change the rule's effective date to June 1, 2017, and provide "workers, small businesses, nonprofits, and colleges and universities more time to prepare for dramatic changes resulting from the department's final rule."
In the meantime, however, employers should continue to work toward complying with the new requirements. Employers who fail to do so face the risk of being out of compliance, subject to fines and liable to employees in lawsuits, including class actions.
Robert Teachout, SHRM-SCP, writes on employment law and HR issues in Washington, D.C.