Note: Sharp readers will note that I talked about overtime rules back in February. It is not that I am running out of ideas (I hope) but the importance of this issue is significant. Fair warning, I will probably bang this drum a few more times this summer and fall.
The Department of Labor issued new overtime pay rules for white collar workers that will take effect on December 1, 2016. The new rules will impact the pay and project management policies for many design firms across the country. Although the rules are only marginally better than the initial proposal, the Department of Labor has drastically changed the pay scale landscape for all companies and could hit the creative industries particularly hard. For many design firms, annual labor expenses have been predictable. With the new overtime rules, consistent labor costs will not be the norm unless steps are taken now to begin complying with the rules.
What the New Rule Says
Previously white collar workers (also called “exempt” workers because they were exempt from the Fair Labor Standards Act (“FLSA”) overtime rules, who receive a fixed salary of at least $455 per week ($23,660 per year) would be exempt from the requirement to pay overtime. Creative professionals fall under the Professional category if the employee is paid at least $455 per week and their work entails “the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” See, here for more on the EAP exemptions. That is the old rule. The new rule is dramatically different.
First, the minimum weekly salary to be exempt will be $913 per week ($47,476 per year). This number is the 40th percentile of all salaries of in the lowest paid census region in the United States (currently the South Region). So the new rule says that any person making less than $913 per week ($22.82 per hour) must be paid overtime. No longer will employers be able to compensate employees with compensatory time for time worked in excess of 40 hours per work week.
Second, the minimum salary will be reset every three years beginning in January 2017. The DOL will determine the 40th percentile of salaries in the lowest paid Census Region and that will be the new minimum salary for Exempt workers. This is significantly better than the proposed rule which had the minimum salary being adjusted every year. There are other aspects of the rule, but these are the two with the most immediate impact.
So here is quick FAQ. If you have others, please call or email me.
What is the easiest way to comply?
Depends on current salary levels. For those employees making more than $45,000, it is probably worth simply giving them a pay raise to $48,000. This cost/benefit calculations are easy when those employees routinely put in more than 40 hours in a week. If you have an employee making $45,000 and they work just 1.4 hours of overtime per week (on average over 52 weeks), they will cross the threshold of $47,476. You might as well just give them the raise. (I know I am just throwing your money around, but what if that employee routinely works 43 hours per week or 156 hours per year. That employee would earn $32.45 per hour of overtime, which for 156 hours is $5,062.20 for overtime. That does not count the payroll taxes you will have to pay on that overtime).
Okay, what if the employee makes less than $45,000?
Well, this is the tricky part. For employees in the zone between $40,000 and $45,000, you really have to do some review of time records and work habits to make a determination. $40,000 per year equates to $19.23 per hour of salary. Overtime pay would be $28.85. To make up that extra $7,476, that employee would have to work 262.1 hours of overtime in a year or just over 5 hours of overtime per week. If you have a $40,000 employee who routinely works 45 hours per week, then a 20% pay raise ($8,000) actually makes sense. It just looks like a fat raise and that can scary, but economically it makes sense.
For someone making less than $40,000, it is probably cost effective to start tracking their hours and limiting them to 40 hours per week.
No more comp time? But my employees love their comp time.
I bet, but here is the thing. You have to pay overtime only if they work more than 40 hours in a week. The rule does not say the employee has to work 8 hours per day, 5 days per week. If you have an employee who needs to go to the doctor or wants to go to their child’s school function or has to take a spouse to the airport, there is no reason they cannot do so, the employee is not “on the clock.” If the employer wants to provide that time with pay and it counts against the employee’s hours for the week, that is fine as well. Policies can be crafted that award “time off” in annual blocks to allow for these kinds of activities. The employee is not working and can still make up the time. , the new rules does not say you can’t give personal time to your employees.
How stringently will this rule be enforced?
Always a good question and that will depend. (classic lawyer answer). There is a non-zero risk of a random audit by the state or by the Department of Labor. But here is an important fact to remember. Employers must file reports with the state and IRS for payroll tax purposes. The states and the IRS have memoranda of understanding to share payroll tax data with the DOL. So do I think creative industries are on the top of the DOL hit list? No, I don’t.
I think the low-hanging fruit is going to be in the retail and food service industries, particularly the store and shift managers who may not make $47,476 but are still otherwise exempt workers. Once those industries are largely “cleaned up” then all of those investigators are going to have to have something to do, so they will start looking at other industries.
So if I am not audited by the government, what is my risk?
Employees talk and it is against the law for employers to prohibit employees from talking about pay (thanks to the National Labor Relations Act and the National Labor Relations Board). So if your employee talks to an employee at another design shop, and one is getting overtime and the other is not, the employee not getting overtime but earning less than $913 per week may have a claim. That employee may file a wage claim with the state. Those wage claims cannot be waived or settled in full by the employee, because part of the claim is owned by the state who wants to collect their payroll taxes. The real kick in the teeth is not the back pay, but the attorneys’ fees the employer may have to pay to the employee and the civil fines the state may impose.
Lack of compliance has a real financial, potentially business killing, impact.
The rule is coming (Merry Christmas?!?). But the good news is there is time to explore ways to become compliant, still offer flexibility to your employees and to make other decisions. Consult an attorney to help you.
MATT JOHNSTON IS A SOLO ATTORNEY WITH A FOCUS ON SMALL BUSINESS REPRESENTATION, COPYRIGHT AND TRADEMARK LAW, AND DISPUTE RESOLUTION. MANY OF MATT’S CLIENTS ARE DESIGNERS AND CREATIVE PROFESSIONALS WHOSE CONCERNS OVERLAPPING MATT’S PRACTICE AREAS. MATT CONCENTRATES ON DRAFTING CLEAR CONTRACTS OF ALL TYPES AND HELPING DESIGNERS WITH THE LEGAL SIDE OF THE DESIGN BUSINESS. AS A BENEFIT TO AIGA MEMBERS, MATT OFFERS A 10% DISCOUNT ON ALL CONSULTATION APPOINTMENTS, FLAT FEE PROJECTS, AND HOURLY FEES.
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