The Department of Labor’s new rules on overtime pay for employees is going into effect on Dec. 1, and while the business community nationwide is resisting the changes, seasonal businesses such as those in Door County could suffer most.
The biggest change to the Fair Labor Standards Act (FLSA) is in the salary level that will exempt employees from receiving overtime pay. Currently, an employee making a salary of at least $23,660 per year and while performing certain duties is exempt from receiving overtime. The new rule bumps that number to $47,476, more than double the previous level. The DOL estimates there will be 4.2 million employees looking at a pay raise in December, at the expense of businesses.
“It’s just unfortunate because it’s a system that works for so many people and that’s what they like about it,” said Pam Seiler, executive director at the Sturgeon Bay Visitor Center, to a group of business owners at a presentation on the rule changes. Inge Bacon, a Sturgeon Bay-based accountant, gave an overview on the rule changes and what they might mean for local businesses.
“You can raise their salary to meet the minimum,” said Bacon, explaining the options for businesses. “You can keep the current salary and pay the overtime if required. You can put them on hourly and pay overtime.”
Business owners like exemptions from overtime. It means that their payroll expenses are more predictable. They don’t have to worry about overtime pay if something forces a few extra work hours from their employees. In seasonal businesses, it means that business owners don’t have to pay employees for 20 to 30 hours of overtime per week during the summer months, knowing that their hours are scaled back in the winter to make up for it.
But on Dec. 1, unless business owners bump their exempt employees’ salaries up above the new threshold, they could be facing massive overtime pay expenses during the busy summer months.
Why the Change?
President Barack Obama directed the Department of Labor (DOL) to update the overtime exemptions under the FLSA because, explaining in a letter, “this policy just hasn’t kept up with the time.”
The overtime rule ensures that anyone who works more than 40 hours per week gets paid 1.5 times his or her hourly wage for those extra hours. Currently, if an employee makes at least $23,660 and has certain executive, administrative or professional duties, they are exempt from being paid overtime. These standards are called the salary basis, salary level and duties tests.
In 1959, the salary threshold was set between $80 to $95 per week depending on the duties of an employee. In 1975, the salary threshold was bumped up between $155 and $250 per week by the Ford administration, again, depending on the duties performed. In 2004, the Bush administration set a flat $455 per week salary threshold.
The Economic Policy Institute (EPI), a Washington DC-based nonpartisan think tank, argues that if the 1959 or 1975 thresholds kept pace with inflation, we would already be near the new threshold level.
In 1975, more than 60 percent of workers qualified for overtime pay. Today, that number is seven percent.
“The passage of 29 years [1975 to 2004] without an adjustment made the salary levels obsolete and irrational…[Bush] created tests with a uniformly low and wholly inadequate $455 a week salary test – barely more than the poverty threshold for a family of four,” wrote the EPI.
The new rule sets a new threshold for exemption to $913 per week, which equates to $47,476. That number indicates the 40th percentile of salaried workers in the South, the lowest-wage region. So 40 percent of people in the low-earning south make about $47,500 and the Obama Administration believes that’s a good number to apply throughout the country.
“Chapel Hill and Durham or something must make like oodles of money to say that $47,000 per year is the 40th percentile,” said Bacon. The median household income in Wisconsin was $55,638 in 2015. The median household income in Door County was $50,078 in 2014.
Obama hails the rule change as a means for middle class Americans to earn a better wage either by a salary increase, or by getting paid overtime wages for the time worked beyond 40 hours per week.
But the business community is finding the adjustment hard to swallow.
Bane for Business Owners
Businesses want to reach that exempt status again, and in most cases, that means paying their employees more. They have three options.
A business could pay their employees time-and-a-half for overtime work, raise their employee’s salary above the new threshold, or limit employees to work no more than 40 hours per week.
Business organizations, along with a lawsuit filed by 21 states against the rule change, deride the move as harmful to business growth and an overreach by the DOL. They claim the rule will force businesses to reduce employee’s hours, cut benefits, convert salaried employees to hourly wages and require everyone to punch the clock.
“Honestly, that’s the only way you’re going to really protect yourself,” said Bacon about having every employee track their hours. She recommends requiring every employee punch the clock, exempt or not.
For employees very close to the threshold, it likely makes the most sense to just bump their salary up to that $47,476 mark and keep their exempt status.
For an employee with a relatively low salary, it might make more sense to convert them to an hourly wage and just deal with the overtime wages.
But Bacon warned that this could have an effect on employee morale, looking more like a demotion than a restructuring of compensation. Converting to hourly wages may also strip employee benefits.
Businesses may choose to hire another employee to take some of the tasks that previously went to someone who worked 50-hour weeks, bringing everyone down to the 40-hour week that would not require overtime.
While the rule change has significant impact on almost all businesses in the country, seasonal businesses such as those in the tourist industry in Door County have a unique struggle.
Many employees of these businesses work more than 40 hours per week in the summer and fewer than 40 hours per week, or not at all, in the winter. Long summer shifts are accepted given the extra time off through the winter months. While an employee might work an average of 40 hours per week looking at the year-round total, the new overtime rule does not allow for that seasonal exception.
“If they are exempt from overtime… then it doesn’t matter. They can work 60 hours in the summer and 30 hours in the winter, if they’re exempt from overtime,” said Bacon. “If they’re not exempt from overtime because they don’t meet all of those three [salary and duties tests], you have to pay them the overtime in the summer.”
Business owners commenting on the policy when it was first released in May questioned the ability of using creative ways to keep their payroll costs the same. One way is to convert employees to an hourly wage and then lower that hourly wage to compensate for the time that will surely be spent over 40 hours. But a disgruntled employee might bristle at the idea of first being shifted to hourly and then receiving a lower hourly wage, even if it means the same income in the course of the year.
The DOL also prohibits any payment structure that has the goal of avoiding the overtime requirements. While enforcement is primarily on a reported basis, it takes little more than an upset employee to bring officials to the front door.
Bacon also noted that compensatory time is not legal in the private sector. A business cannot promise time off next week for overtime hours worked this week. If an employee punches more than 40 hours in one week, they must be paid overtime, no matter how much time off they get at another point in the year.
No Turning Back Now
“Is this just another government agency that’s passing laws that aren’t legitimately passed?” said Cap Wulf at Bacon’s presentation.
Wulf echoes the belief of many businesses and the 21 states across the country that have filed a lawsuit against the DOL claiming that the new rule is illegitimate since it didn’t go through the traditional legislative channels.
But the prevailing opinion is that the DOL and the president have the authority to change the salary threshold. The change does not have to go through the legislature because it is simply a change to a law, not a new law itself.
“No change in interpretation of the duties test, no change in the salary test,” said Bacon. “Nothing that I covered except that $24,000 versus $47,000 is really new law. That’s the only thing that would change.”
Obama vowed to veto any bills that arrived on his desk to stall or repeal the change in salary level, some of which have already been attempted.
While the new president will have the power to change the rule again, they won’t be able to do so by the time it goes into effect on Dec. 1, leaving businesses with no choice but to adapt.