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New overtime rules for white collar and creative workers will take effect in 2016. The new rules will impact the pay and project management policies for many design firms across the country. The U.S. Department of Labor plans to issue the new rule in July with a likely effective date in October. While July and October seem far in the future, now is the time for design firms, indeed all employers, to start putting into place policies and procedures that will comply with the new overtime rules. 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.
The Old Rules
White collar workers, or as the U.S. Department of Labor calls them, Executive, Administrative, and Professional Employees (EAP), who receive a fixed salary of at least $455 per week ($23,660 per year) are generally exempt from the requirement to pay overtime for hours worked in excess of 40 hours in a work week. 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.
Many design firms likely pay creative and even non-creative staff a fixed salary greater than $23,600 per year which allows the employees to “work until the job is done.” If that standard meant working 50 hours in one week, and 37 in the next, so be it. The employee received their fixed salary and the firm enjoyed relatively fixed labor costs. The old overtime rules provided great stability for design firms because the low minimum exempt salary meant that firms could pay their creative staff a competitive salary, but not worry about fluctuations in overtime when projects required extra work.
Yet, according to the DOL, there are two major problems with the old rules: 1) the salary level has not kept pace the general increase in salaries since 2004 and 2) employers have taken liberty with the definitions of EAP and many workers who should not be exempt from overtime are classified as exempt. For example, an administrative assistant under the DOL’s rules is NOT an administrative employee because an administrative assistant usually does not exercise individual judgment or discretion in matters of significance to the company, no matter how valuable you may find your assistant’s work. But because the administrative assistant was making more than $23,600 per year, they would often be classified as an exempt employee.
The New Rules
To address the two major problems of the old rule, the DOL decided on one solution: raise the minimum exempt salary for EAP workers. Under the new DOL rules, the minimum salary for exempt employees will be set at $970 per week, or $50,440 per year, more than doubling the minimum salary now in effect. So by October if not a little sooner, employers with staff whose salary is less than $970 per week must start paying overtime for all time exceeding 40 hours in a work week. The DOL believes that salary is the only true objective measure of exempt vs. non-exempt staff because job duties can vary so much from employer to employer. Thus, no matter what the employee’s job duties are, if the salary is less than $970 per week, the employee is eligible for overtime.
The new overtime rules will not fix the minimum EAP exempt salary at a stated dollar amount as has been done in the past. Rather the minimum EAP exempt salary will be indexed at the 40th percentile of all salaries in America. Each year the Bureau of Labor statistic issues data on salaries in the U.S. (among much other information). The DOL will use the salary information to reset the minimum FLSA exempt salary on an annual basis.
Beginning in 2017 and each subsequent year, employers will either need to raise the salary of employees to keep workers above the minimum exempt salary or reclassify workers between exempt and non-exempt. While usually salaries will increase year over year, it is possible that salaries may decrease. Employees earning between $50,000 and $52,000 may be eligible for overtime one year and not the next or vice versa without any change in their salary.
The First Big Problem
The first big problem for design firms caused by the new overtime rules is many creative professionals simply don’t earn $970 per week, particularly in smaller markets and at smaller firms. Many creatives track their time for client billing purposes, but may not “punch a clock” for their own work hours. So a creative who bills 30 hours a week to clients might actually work 45 hours when other tasks are considered, such as education, sales matters, internal meetings, non-client emails, and other duties.
Before the New Rules take effect, companies should take advantage of the time to collect data related to each employee’s work week. Start asking employees to clock in and out when they work. There are dozens of apps that will does this, many of which plug in to various payroll vendor systems. Determining the work habits of employees is important so that companies can consider the best classification for each employee.
If during the data collection period, the firm has a creative professional regular works 47 hours and makes a salary of $42,500 per year, it may actually be cost effective over the long run to raise that individual’s salary to $50,440. For a person making $42,500 per year, their hourly wage is $20.43 and their overtime wage is $30.65. At 47 hours per week, the employee’s weekly wage with overtime is $1,031.85 or $53,639 per year. Paying that person a salary of $50,440 saves the employer $3,200 per year. But decisions such as these can only be made with accurate data
The Second Big Impact
After collecting data and making a plan regarding pay rates and classifications for each employee, design firms can then use the data to address the impact of the overtime rules on project management.
Unless the design firm is prepared to have weekly and monthly labor costs fluctuate heavily due to overtime pay, the firm will have to send staff home at 40 hours per week. A strict 40 hour per week time limit means that the number of hours a creative has available to work on client projects might be limited to perhaps 30 or 32 hours per week. That limits the number of hours per week that an employee is available to work on client projects, meaning production cycles for client work will be longer. Collecting data during the period before July/August will allow firms give better time estimate and schedule quotes to clients on a project as well as managing staff.
The doubling of the minimum exempt salary level to $50,440 will change the manner in which design firms manage their staff. But the changes need not be catastrophic. The DOL will not be issuing the rule until July 2016, giving firms enough time collect data on employee work habits and determine how to manage salaries and overtime. The time also allows firms to determine their impact on project scheduling as well. However, waiting until the last minute will be expensive.
MATT JOHNSTON IS A SOLO ATTORNEY
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