Overtime Rule Changes Push U.S. Payroll Upward

Six months have passed since the new set of white-collar overtime regulations took effect, and critics dire predictions of millions of workers losing their eligibility for overtime pay have yet to materialize. In fact, HR professionals, lawyers and officials with the U.S. Department of Labor (DOL) say that more employees gained overtime protection than lost it, forcing some employers to exceed their 2004 compensation budgets.

The rule changes definitely put the squeeze on some employers payroll budgets as 2004 ended. Employers just didnt have a clear idea how many employees would be reclassified as non-exempt and eligible for overtime once the rules took effect in August, said Dan Moynihan, a principal with Compensation Resources Inc. in Upper Saddle River, N.J.

Moynihan said the budget problems created by the rule changes were a temporary setback for most firms. The good news was that the changes were a timely wake-up call that helped employers plan their 2005 budgets.

Since employers had four months of operating under the new rules [Aug. 23-Dec. 31], they had a better idea what to expect for 2005 and how to set their budgets accordingly, Moynihan said. Controlling the overtime costs also becomes a management issue, because with an increased number of employees earning overtime, employers now will be keeping much closer track of work hours and output.

Job classification audits conducted by employers to comply with the rule changes created some unexpected costs. According to many HR professionals and consultants involved in the audits, the work was much more labor intensive than most employers expected.

Some employers held off until it became apparent that the rules were going into effect and then found they had a lot of catching up to do, said Larry Lorber, an employment attorney and partner in the Washington, D.C., office of the Proskauer Rose law firm. Political volatility in Washington made it unclear for much of 2004 whether the DOLs biggest update of overtime rules in a generation would go into effect as planned, and stay in effect.

I know from working with several clients that their HR staffs had to put in a lot of extra hours to perform comprehensive classification reviews once it was apparent that the rules were to remain in effect.

A positive outcome

The fact that the rule revisions forced employers to conduct job classification audits probably was the most positive outcome of the ordeal, according to Lorber.

Employers really should perform classifications reviews on a regular basisideally, once a year or at least every two years, Lorber said. But it is human nature to hold off on something until youre forced to do it, and this new level of awareness among employers is a very good thing.

Victoria Lipnic, assistant secretary for DOLs Employment Standards Administration, which oversees the Wage and Hour Division, agrees with Lorber, saying that the new rules did raise awareness among employers about the need to keep overtime classifications current.

The regulations that we were operating under were 50 years old and in desperate need of an update, Lipnic told HR News. Not only do we now have a set of regulations that ensure workers who deserve overtime pay now receive it, but the rule changes woke many employers up and made them realize that they really needed to comply with the law.

Lipnic confirmed that the new rules have increased the number of workers entitled to overtime pay, which is what analysts with the Wage and Hour Division had predicted all along. Prominent Democrats in Congress and labor union leaders had claimed that as many as 6 million workers would lose overtime pay under the changes DOL put into place in August.

The intent of the rule revisions was to make sure that workers are paid correctly for their work, and I believe that we have clearly met that objective, Lipnic said.

Moynihan with Compensation Resources Inc. supports Lipnics assessment, stating that most employees reclassified under the new rules moved from exempt (not eligible for overtime pay) to non-exempt (eligible for overtime), and that, overall, the number of workers reclassified was marginal.

However, the number did differ from company to company and from industry to industry. So some employers in IT (information technology) did have quite a few more workers who became non-exempt, Moynihan said.

Opponents of the new overtime rules havent given up the fight. They contend that six months is not long enough to get a complete picture of the effects of the rule changes.
When asked to comment on the estimates from employers, attorneys and the DOL that more workers have gained overtime protection, staff with the offices of Sens. Tom
Harkin, D-Iowa, and Debbie Stabenow, D-Mich., did not return phone calls.

Feeling the impact

Other compensation consultants confirmed Moynihans claims, saying that some industries such as IT and health care did tend to reclassify more workers once the new rules took effect on Aug. 23. And while the number of employees reclassified wasnt overwhelming, employers did feel and are still feeling the impact.

In some cases the number of employees reclassified under the new rules was fairly significantespecially for many larger employers, said Nadine Winter, head of the Southern California compensation consulting practice for Watson Wyatt. And the amount of overtime these employers now must pay will definitely cut into their 2005 revenue projections.

Winter said employers have only two significant options to offset this increase in overtime costs: raise the price of their goods and services or lower the base wage costs of the employees now eligible for overtime. Intense competition from countries with lower labor costs could rule out raising prices, she says, so most employers will be opting to reduce their wage costs.

Theres a set amount of revenue employers have to work with, and the money has to come from somewhere. So most employers that I work with are now considering reducing merit and cost-of-living pay increases for this year to offset their new overtime costs, Winter said.

For example, many employers may have been considering pay raises that average around 3.8 percent but are now thinking of lowering the average pay raise to 3.4 percent, which should effectively offset their higher overtime costs.

Liz Snyder, an employment law consultant with Hewitt Associates in Lincolnshire, Ill., confirms that many of Hewitts clients currently are making similar decisions.
Its the most cost-effective way to approach this situation, Snyder said.

She also says the increased number of white-collar workers now classified as non-exempt has put some interesting wrinkles into employer incentive pay plans.

Incentive plan impact

Most, if not all, employers define who is eligible for an incentive pay plan by the employees overtime status. Employees who are non-exempt generally do not participate in incentive pay plans, Snyder said. Now we have a large number of white-collar workers who have been reclassified as non-exempt and cannot participate in the incentive plan, so they probably are going to view their new overtime status as their new incentive pay plan.

These reclassified workers will most likely begin to work more hours to ensure they receive overtime to offset the loss of their incentive pay or bonuses, Snyder and Winter contend, which in turn will reduce productivity. Employers that attempt to limit their overtime costs by regulating work hours strictly could see an increase in turnover and loss of productivity as employees look for new options to regain their pay losses.

The long-term effect will be more pressure on employers to either raise their price of goods and services or find alternative ways to lower labor costs and increase productivity, which could translate to a growing number of jobs outsourced overseas, Winter said. I believe the forces at work here could have a serious detrimental effect on the competitive position of many U.S.-based businesses.

Winter says that she has received one or two phone calls a week since the new overtime rules took effect from businesses that are considering these problems and are looking for solutions.

Employers are very concerned that the increased number of non-exempt workers will raise their compensation costs and reduce productivity simultaneously and want to find a way to ensure this doesnt happen, Winter said.

Winter said incentive pay plans can provide the solution. However, the plans must be structured so employers arent hit with the double whammy of paying overtime and incentive bonuses.

Incentive bonuses should only be paid out to projects that are completed on time and on budget, which can go a long way in ensuring that overtime is carefully managed and cost-effective, Winter said. Im not saying that the new overtime rules will completely hamper incentive pay plans. We live in a complex world with complex rules, and to succeed an employer will have to think creatively how to work within these rules and develop compensation plans that work and produce the desired results.

Hill battles not over

Although its becoming apparent that millions of workers have not lost their right to overtime pay, opponents of the new white-collar overtime rules still claim the rule revisions were a bad idea and are pushing legislation in Congress that would rescind portions of the regulations.

The administrations overtime regulations are a shameful attack on the 40-hour work week, purposely designed to strip millions of workers of their right to overtime pay, said Democrat Harkin in introducing the Overtime Rights Protection Act of 2005 on Jan. 31.
Harkins proposal would restore the right to overtime pay to any worker who was eligible for overtime before the new regulations took effect in August and would increase the number of workers covered by overtime protections by raising the minimum annual salary threshold to $30,712. The current salary threshold is $23,600.

Despite his talk of working across party lines, the president clearly has been determined to impose anti-worker and anti-family regulations, said Harkin, who has been a leading opponent of the new overtime rules. I will continue to fight against these unfair regulations.

Harkins overtime bill was referred to the Senate Committee on Health, Education, Labor and Pensions.

Also in January, Sen. Stabenow introduced the Fair Wage, Competition and Investment Act of 2005, which also would rescind portions of the new overtime regulations. In addition, her bill would raise the federal minimum wage to $7.25 an hour within two years.

Political observers and sources familiar with the issue indicate that the two bills have little chance of passing as individual pieces of legislation, especially since the Republicans gained seats in the House and Senate in the 2004 elections. Democratic efforts to amend unrelated legislation to roll back the overtime rules failed in 2004.

However some lobbyists say that proposals to affect overtime or raise the minimum wage could be added as amendments to other pieces of legislation again this year.

Already, Democrats in the Senate, led by Sen. Edward Kennedy, D-Mass., have been attempting to attach a series of amendments to S. 256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.