We spoke with Jenna Bedsole, a specialist in labor and employment law, to get her insights on recent federal policy changes that significantly affect how employers account for overtime pay. On May 17, the Department of Labor issued a final rule that affects overtime pay under the Fair Labor Standards Act. Among the changes, which go into effect December 1, the most significant will more than double the salary ceiling for workers who are considered eligible for overtime pay.
Bedsole is a shareholder in the Birmingham office of Baker Donelson and leads the firm’s Labor & Employment Group.
States like Alabama that have a low per capita income will be more strongly affected by the policy change, because one of the things the Department of Labor did was to tie the salary to the lowest average wage rates, which happen to be in the South. One of the tests for overtime eligibility is the higher threshold annual wage, which will be bumped from $23, 660 a year to $47, 476. And one of the things the new changes provide for are automatic updates every three years, beginning January 2020. The updated thresholds are tied to the 40th percentile of full-time salaried workers in the lowest paid region, which is the South.
Businesses will have a choice to make: whether to keep employees exempt at a higher annual wage or bring those workers who don’t make that threshold into the hourly system and track their overtime. If they don’t make enough under the new salary threshold to be exempt and they also work over 40 hours, the choice their employer will have to make is whether to hire a part-time person to do the additional work. If an employee was making $25, 000 and met the former threshold, should you be paying someone the same who is now only working 40 hours? Maybe those salaried employees will end up making less now as hourly employees.
The last change was in 2004, when a lot more people became covered under the Fair Labor Standards Act. At that time, we saw a lot of employees who felt like the changes they had to make were a demotion. They felt they were in a white-collar job and had been demoted to a blue-collar job. And with those changes, there was a lot of training that went along with the changes, such as hourly employees having to clock in and out when they take a lunch break. One of the things hourly employees can’t do is work and eat their lunch on the job and not get paid. If you’re sitting at your desk and eating, you have to be paid for that time. I was talking to an administrative assistant who is really stressed about the changes, because they are going to have to be looking at the clock all of the time.
With personal devices and people working from home and answering email when home, this work is compensable time and needs to be accounted for. It’s difficult for employers to manage. Training is important to tell employees that they are not allowed to work from home unless they record the time that they work.
The projections are that there are 4 million workers throughout the U.S. who will be dealing with these issues. For some small businesses, they may be dealing with situations that they have not had to deal with before.
There are added benefit costs to hiring additional workers, and you also have hidden costs of ramping up training and providing resources to assist them to do their jobs, and the administrative costs of hiring and managing more employees.
It definitely exposes the employer to a lot more liability. The highest percentage of cases and the kind of cases growing the most in the federal court system are FLSA cases. You can expect from the defense bar those cases will increase. The change is going into effect December 1, and it is time to get procedures in place and get employees trained in respect to clocking in and out.
Employers should be looking for some advice with the wage and hour laws, from human resources professionals or labor and employment lawyers. It shouldn’t be too costly for employees with 50 or less workers, to have somebody review and audit the payroll practices. With a company that size, there are not as many job classifications affected, so it should not be very expensive.
The first thing to do is to run a payroll report that lists the salaries of employees. Two, review the job descriptions. Three, consider the budget and the amount of money you can spend. Four, seek some guidance to make sure you’re complying with the law.
You can count commissions and non-discretionary bonuses up to 10 percent of the salary threshold. But you have to make sure you’re paying those quarterly. My recommendation is that, because these regulations can be really complicated, I do recommend that you have someone else double check you. The Fair Labor Standards Act can be a very pro-employee statute. Also, it is a fee shifting statute. If the employee wins he can recover his legal fees from the employer.
These cases originate two ways. The employer gets sued in federal court. The other way is the Department of Labor investigates, and they can file, which is not at all uncommon. I’ve had small businesses sued in collective actions, which are like class actions, involving multiple employees. The majority of cases are individual claims, or two or three employees contend they are not being paid properly. For example, they might contend they have worked through lunch hours and not been paid for two to three years.
In order for a company to be sued under the Fair Labor Standards Act, the company has to have an annual dollar volume of $500, 000 or more. There is no requirement as to the number of employees. The Department of Labor can go in and audit, and they will review your payroll records, your timekeeping and may interview your employees on site. We are not half way through the calendar year, and I have four clients who have seen Department of Labor audits.
It’s a good idea with these new changes to take a comprehensive look at other parts of your business at the same time. While already reviewing salaries, you may want to take a look at pay practices, review the employee handbook and make sure that you’re up to date, and not only with wage and hour laws. Every year there are new decisions of the Supreme Court that affect employers. This is an opportunity to have a checkup.
Chris McFadyen is the editorial director of Business Alabama.
Interview by Chris McFadyen
