Anew ruling aimed at giving more salaried workers access to overtime pay may have negative consequences for West Michigan companies and could ultimately end up hurting workers, despite the best of intentions.
Experts say the updated rules, which more than double the threshold that exempts a “white collar” worker from overtime pay, will ultimately reduce companies’ flexibility, reduce worker morale and lead to significant compliance costs.
“It’s difficult to explain to people how a policy like that ends up being bad for people all around, but from my position, it is so clearly bad for everybody,” said Paul Vander Heide, owner of Grand Rapids-based hard cider maker Vander Mill LLC.
Under the new rule, which goes into effect Dec. 1, employers will be required to pay overtime to employees in executive, administrative or professional positions if they make less than $47,476 a year, more than twice the amount stipulated under the current regulations.
While the final ruling by the U.S. Department of Labor was billed as a way to fairly compensate more workers, Vander Heide believes it will actually put a damper on motivated workers’ career advancement.
“You’re going to have folks out there that may be getting that entry-level salary at $40,000 and they want to light the world on fire, but their employer is going to say, ‘I can’t afford to pay you overtime. I know you want to work, but it’s just not in the cards,’” Vander Heide said. “You’re basically forcing people that may want to work more, to not work. It’s very frustrating.”
The ruling impacts workers considered white collar, including those who lead teams of people, make hiring, firing and other influential business decisions, or are involved in specific professions, such as an engineer.
For most employers, the new ruling simply comes as too much of an increase at once in the threshold qualifying workers for overtime pay, said David Smith, president of The Employers’ Association of Grand Rapids.
“I think most employers wouldn’t have a problem at all with a jump in base pay, but to have a jump that pretty much doubles what was established seven years ago is a tough one to deal with,” Smith said.
NAVIGATING A GREY AREA
Despite its potential impact to workers, employers will have limited options in how they move forward under the regulation.
If white collar workers do not meet the new $47,476 annual salary threshold, employers either will need to raise workers’ salaries to meet the new ruling, convert workers to an hourly wage, or pay them overtime through a salary non-exempt arrangement, said William Fallon, a partner at Grand Rapids-based Miller, Johnson, Snell & Cummisky PLC.
While each of those solutions are pretty clear-cut, they come with potential consequences for employers, said Fallon, who chairs the law firm’s wage and hour practice group.
For example, converting a salaried employee to hourly or salary non-exempt status can severely impact worker morale, as many people associate a level of prestige and career advancement with being a salaried worker, sources said.
“When people are converted over from exempt to non-exempt, there’s a dramatic cultural impact,” Fallon said. “Even though the Department of Labor talks about all the good they intend to do with this rule, we never hear stories from our clients about how people are happy about being converted to non-exempt. Many are mad about it.”
For his part, Vander Heide is opting to maintain the salaries of the five Vander Mill workers affected by the ruling and manage their time more carefully.
“Week in and week out, depending on the state of the business for that given week, we’re going to have to make the decision of if it’s worth it for this person to put in the extra time,” Vander Heide said.
However, employers could run into trouble with limiting hours for salaried workers. In particular, many executives are concerned about limiting the normal flow of email and other after-hours communications with salaried workers.
“The electronic issue is one that many employers are concerned with because if an employee works from home (or) checks email, there are considerations in the law that says that is work and you have to pay for it,” Smith of The Employers’ Association said. “You’re suddenly getting into the whole issue of, ‘I can’t let them check emails because there is a potential that I’m going to have to pay them for that.’”
Ultimately, if an employer is going to attempt to control a workers’ overtime, companies should incorporate written language into their legal framework that spells out the circumstances in which overtime is authorized and when it is not, Fallon said.
‘A BEES NEST’ FOR NONPROFITS
While companies will be affected differently based on their business structure, nonprofit organizations, which traditionally pay less than for-profit companies, could be significantly impacted, sources said.
For example, The Muskegon Family YMCA is currently struggling with how to manage seasonal camp workers at its Camp Pendalouan, many of whom stay on after camp to lead other educational programs for the organization, said CEO Bruce Spoelman.
Currently, there’s an exemption for workers at organizations that meet federal specifications for seasonal work. However, the law becomes less clear when those workers stay on with the organization after the seasonal work ends, Fallon said.
“If you work there year-round and manage the camp on site for summer, are you exempt for the months at the camp or not exempt from any of it?” Fallon said.
To work around that confusion, Spoelman is considering moving some employees to hourly workers, hiring more part-time workers and limiting the hours of camp counselors.
“Whatever solution we come up with, it’s costing more money and we’re just trying to manage that,” Spoelman said. “We’re doing our best to not cut any programs, but we’ve had to get creative as much as possible with division of duties.”
Other nonprofits are working to see if they fall into an exemption from overtime requirements for organizations involved strictly in charity work, such as disaster relief or shelters for victims of sexual assault, Fallon said.
“Nonprofits are a bees nest,” Fallon said. “The guidance from the Department of Labor creates more gray area than it enlightens. We have a lot of nonprofit clients that are trying to evaluate if they fall in the charitable category.”
PAYING FOR COMPLIANCE
For most employers, the new ruling will amount to a significant increase in human resources expenditures and compliance costs.
“It’s deeply concerning to us,” said Delaney McKinley, director of human resource policy and membership development at the Lansing-based Michigan Manufacturers Association. “Ultimately, what it’s going to to do is have a greater burden. It’s going to reduce opportunities in the manufacturing sector. People are going to have to watch the red tape instead of making decisions for an employee’s career. You’ll have to talk to your lawyer about every decision you make.”
To ensure compliance, companies will need to examine all their employees who were exempt from overtime under the old ruling and make a decision on how to go forward — either by converting that person to hourly, raising their annual salary above the $47,476 threshold or transitioning them to salary non-exempt status, said Fallon of Miller Johnson.
That analysis can add up to a significant amount of compliance costs. In an industry already burdened with talent constraints, McKinley said these additional compliance costs take away from manufacturers’ abilities to invest in their workers and in their organizations.
“Every dollar that’s spent on compliance is a dollar not spent on investing in capital,” McKinley said. “We’re just soaking dollars into HR attorneys and red tape when we could do more.”
Yet not all organizations, particularly those in the nonprofit sector, have the resources to hire labor attorneys and other advisers to ensure compliance, potentially leading companies to fall out of compliance, Fallon said. He added that he expects to see more litigation surrounding overtime pay in the coming years.
“(Nonprofits) don’t have dollars laying around to spend on labor lawyers or other human resources professionals. They’re just doing what they can,” Fallon said. “A lot of them might not even know what’s coming. The Fair Labor Standards Act is always hard to comply with, but my fear is that employers are going to be caught in this — it’s the brutal reality.”