6 aspects to consider when dealing with the new federal rule
By Melissa Walker
A new federal rule regarding overtime pay for salaried employees could mean an expense of an extra $150,000 a year for local business Gusto Pizza Co.
Josh Holderness, one of the co-owners/co-operators of the restaurant that has locations in West Des Moines, Johnston and Des Moines, says the owners continue to meet with a labor attorney and a certified public accountant to determine the actual costs to the business and what changes can be made in order to remain profitable.
Earlier this year, the U.S. Department of Labor, at the direction of President Barack Obama, approved a regulation that, beginning in December, requires salaried employees who earn $47,476 or less per year to be paid time and a half if they work more than 40 hours in a week. The previous threshold was $23,660 and was last updated in 2004. The rule was intended to boost low- and middle-income wages and to help workers who accrue long hours but have been treated as employees exempt from overtime because they perform some managerial duties.
Those who make more than the new minimum threshold may still be paid overtime unless they are “exempt” employees, meaning their duties primarily involve executive, administrative or professional duties such as managing employees or overseeing a department. To ensure employees are exempt, a duties test is available on the U.S. Department of Labor website.
According to the labor department, the new rules will make more than 4 million Americans eligible for overtime pay. In Iowa, at least 44,000 workers are predicted to be affected by the rule.
“It’s certainly causing us to have to evaluate our entire business model and how we can remain profitable as a business,” Holderness says. Gusto has three locations with 110 employees, nine of whom are full-time salaried managers.
The labor department says employers have three main options for those employees who are affected by the rule change:
Pay time and a half for more than 40 hours worked in a week
Raise a worker’s salary to more than $47,476 to avoid having to pay overtime
Limit workers to 40 hours per week to avoid paying overtime
The severity of the effects from the new federal law will vary from business to business. Some will experience no effects such as grocery store chain Hy-Vee Inc., which has its headquarters in West Des Moines. A spokeswoman says none of the company’s employees are affected by the new federal overtime law.
Retailers and restaurants will have varying effects depending on the number of salaried positions they have. Experts say most low- or mid-management workers will be affected. Small boutique stores such as Mainstream Boutique in Waukee will make adjustments to their one salaried employee in order to limit potential overtime costs.
The change also will affect all private sector industries along with government and nonprofit groups.
The National Federation of Independent Businesses estimates that 44 percent of small businesses will be affected by the new rule. The advocacy group represents 325,000 small businesses across the country and works to level the playing field with larger businesses, government and labor unions in the areas of taxes, healthcare, regulations and more in order to help business owners run their businesses within interferences.
“This rule means less scheduling flexibility, fewer bonuses and fewer promotion opportunities,” NFIB wrote in an issue statement about the rule on its website.
Businesses also could cut employees’ base pay to offset the new overtime payments, which would keep the paycheck the same as long as the employee was working overtime.
Here are six aspects to consider about the new overtime rule and how to establish your company’s workforce:
- Consider how decisions will affect employees, consumers
Holderness says Gusto’s three owners are relying on professional guidance to clearly understand all of the overtime law’s implications. They’re reevaluating their business model from the corporate level down.
They’re considering numerous options including whether to reduce the number of managers per store to two from three and bring those other individuals up to the corporate level to oversee operations. Current salaried employees could be moved to hourly pay.
“It’s potentially a $150,000 swing for us,” Holderness explains.
The NFIB warns that costs could be passed on to the consumer in many cases.
Holderness says he’s seen models where a 5 percent across-the-board increase in menu prices is being suggested for restaurants to offset the increase in salaries.
“I think you’re going to see that everywhere as people work to accommodate the new laws,” he says.
- Understand regulations that dictate employee wage classification
Overtime and wage rules have been in effect for years to protect lower-income employees who work more than 40 hours per week but are only paid a base salary without overtime.
The Fair Labor Standards Act requires most employees in the United States be paid at least the federal minimum wage of $7.25 an hour for all hours worked and overtime pay at time and one half the regular rate of pay for all hours worked in excess of 40 hours in a work week. However, there are exemptions from both the minimum wage and overtime pay for employees who are classified as executive, administrative, professional and outside sales. These employees are generally exempt from overtime pay if they meet certain job duties and receive a certain level of pay per week.
Businesses pay their employees either an hourly or salary wage. NFIB warns that each state may enact wage and hour rules differently than the new federal overtime guidelines, and that businesses should follow whichever rule benefits employees.
For the city of Waukee, employees are generally salaried if they supervise two full-time equivalent positions or oversee a department. The city’s salaried employees are exempt from overtime pay. Most of the city’s 125 employees (this does not include seasonal help) receive an hourly wage, and all union employees are paid by the hour.
City officials had to adjust two positions at the library as a result of the new overtime rules, says Patty Holden, the city’s human resources director.
“There were a couple of positions we restructured so that they either became an hourly position, or we put more responsibility in that position and we increased the salary,” she says.
The position that was shifted to hourly will still receive the same end wage. The pay is just now divided out hourly. City officials made the decision to shift the position to hourly because the budget would not allow for the salary to be increased to the new federal law minimum of $47,476, Holden says.
“For us, it was really easy,” she says. “I went through every salaried position and reevaluated. Those were the only two I had an issue with.”
- Find methods to regulate potential overtime costs
There are steps business owners can take to limit costs by ensuring their employees don’t work overtime. This includes requiring all overtime to receive preapproval, switching employees from salary to hourly, and installing time clocks, which require employees to clock in and out each time they start and end work.
NFIB recommends business owners make a list of all salaried employees who make less than $47,476, and then consider whether it makes sense to raise the salaries to the new threshold if the employee works more than 40 hours a week or to convert the employee to an hourly wage and limit or prohibit overtime.
Employers will be able to take into account employee bonuses and commissions (up to 10 percent) when considering whether the employee meets the new threshold.
NFIB’s position states that moving managers from salaried to hourly positions forces them to keep track of and report their hours, and that offering fewer salaried, managerial positions could be a sign to employees there is less opportunity for growth at the company.
Within the city of Waukee, all overtime must be approved by a supervisor, manager or department director, Holden says. Overtime is rare but may be worked out of necessity if a deadline needs to be completed. For example, recent rains caused a delay in a street project. There was a break in the weather, and the job needed to be completed, so workers were approved to work overtime.
“Those are the types of situations when we go into overtime,” Holden says. “Typically, there isn’t much overtime at the city.”
At Mainstream Boutique in Waukee, manager Angie Ashmore’s pay will switch from salary to hourly with the new rule. All other employees are part time and paid on an hourly basis.
Ashmore says this won’t affect her much because she worked 40 hours a week most weeks anyway, and her final wage will stay the same. She’ll still be able to maintain the same flexibility she has in her schedule now. The biggest change is that she’ll now clock in and out each day.
- Evaluate other ways you can help employees, go above what law requires
Josephs Jewelers in West Des Moines has always paid its employees overtime, even those who traditionally would be exempt salaried employees, says Toby Joseph, who co-owns the family-owned jewelry store with his brother.
Josephs employs 65 people between its two locations, and almost all employees are paid by the hour. The company also has a policy that it pays employees time and a half if they work on a Sunday regardless if they’ve worked fewer than 40 hours in the week, Joseph says.
“We’re already way ahead of the guidelines,” he says. “We’ve done it for years. I don’t know if it helps retain (employees), but we do have a lot of people who have been with us for a lot of years.”
Holderness says the company is working on the wage issue months in advance to limit the effect on employees. The federal mandate was announced six months before it is set to take effect.
Layoffs “would be an absolute last-case scenario,” he says. “We have so many great people who have been with us since the time we opened our first location in 2011. They’re just as responsible for the growth in our business and our brand, and we want to make sure they stay long with us.”
Holderness says Gusto wants to open more locations and hire more employees to create more jobs for Iowans.
“One of the most detrimental effects of this blanket increase across the country is they’re looking at cost of living in California and New York and not taking into account that for us here in Iowa, that cost of living is considerably lower,” he says.
- Determine whether independent contractors, part-time workers can help fill the gap
Some companies hire outside independent contractors to perform work. Usually, these employees are exempt from the Fair Labor Standards Act and any overtime pay because they do not have an employee-employer relationship, according to an employee with U.S. Department of Labor field office in Des Moines.
According to Aabaco Small Business, an online small business directory and resource site, independent contractors can cost more per hour to pay, but a business owner will likely save money overall because they aren’t paying benefits and other perks to the individual. There can be more flexibility with contractors because they don’t have to be rehired after the contract is finished if they weren’t a good match for the company. Independent contractors also often offer years of specialized service and don’t need to be trained, and they are responsible for their own permits and professional licenses.
There are also downfalls to independent contractors, Aabaco reports. Business owners don’t have as much control over how tasks are performed because contractors operate their own business and oftentimes don’t perform work on site. Contractors also are hired short term, so the same person might not be available for the next project.
Holden, with the city of Waukee, says the city does not hire contractors to perform work. The one exception might be within a city department, such as parks and recreation, if an outside company is contracted to mow medians or provide other lawn care services.
The labor department also suggests business owners look at whether to add part-time workers to pick up the slack to avoid paying overtime.
- Contact elected leaders about new rule, other proposed changes
Some movement has been made at the national level to slow implementation of the overtime rule. Four Democratic Congressmen introduced legislation before the summer recess that would reduce the overall effect on small businesses. Under the bill, the full amount of the proposed salary increase wouldn’t take effect until after Dec. 1, 2019. Instead, there would be annual gradual increases that would start with an initial increase to $35,984 by Dec. 1, 2016. The salary threshold would then increase weekly starting in 2017 until it reached the full proposed amount in 2019.
Central Iowa business owners may have another issue to address, as well. Polk County Supervisors are considering whether to increase the minimum wage to $10.75 per hour by 2019 across the county. In the spring, supervisors convened a 13-member minimum wage task force to explore the wage increase. In early August the taskforce agreed to raise the minimum to $8.75 in April 2017, to $9.75 in January 2018 and to $10.75 in January 2019.
Officials from Polk County’s cities will have the ultimate say in what happens in their communities. They can either take no action and comply with the new minimum wage; opt out by passing an ordinance to stay with the state wage of $7.25 an hour; and create their own minimum wage with exception and stipulations. Dallas County supervisors have yet to officially address the topic.
Meanwhile, the impact of these increases will certainly affect tens of thousands of workers and the companies that employ them.
“We’re still a small business,” Holderness explains. “Just a couple of guys trying to make a living.”
Josephs Jewelers. Photo by Melissa Walker