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New Overtime Rules Could Cost a Bundle

Proposed changes in federal overtime laws could cost employers big bucks but may save them even more in legal costs.
April 22, 2003
URL: http://www.entrepreneur.com/article/61252

At around 31,000 words, the current Fair Labor Standards Act (FLSA)--the complex rules that define when employers are required to pay white-collar workers overtime--isn't exactly the most hands-on government document available. The Department of Labor's recent proposal to update overtime laws might help eliminate some of the red tape for businesses by simplifying a section of the FLSA--but at what cost?

The current rules state that workers who make less than $8,000 a year are guaranteed overtime, says Tammy McCutchen, administrator of the Labor Department's wage and hour division. The proposed rules--which could take effect as early as late 2003--promise overtime to more white-collar salaried employees by raising the minimum salary level required for the overtime exemption from $8,000 to $22,100 year. This is the largest increase since the FLSA was enacted in 1938. "What that means is that everyone who makes less than $22,100 a year is automatically entitled to overtime," says McCutchen.

The changes would not affect employees who do manual labor, such as mechanics, plumbers or electricians, and are already guaranteed overtime. Only employees who work in an office environment and do non-manual work would qualify, says McCutchen.

The simplified rules, which come in response to rising litigation between employers and workers, should ensure that employers understand what their legal obligations are, says McCutchen. This should make the rules easier to comply with and easier for the Department of Labor to enforce.

However, the annual payroll costs--estimated at $335 million to $896 million--could be hard for some businesses to swallow. The changes would mean higher payroll costs for businesses, especially for those who have several employees who work long hours but still make salaries less than the $22,100, like assistant managers of stores and restaurants. "Basically these employers will either start to pay those employees overtime," says McCutchen, "or they will have to raise their salaries over the $22,000 level."

Add to that the additional one-time cost--estimated at $535 million to $680 million--for businesses to implement the new rules in employee compensation programs, and the bill really starts to soar. The total costs of this regulation to businesses? Somewhere between $870 million and $1.58 billion, says McCutchen.

But it's not only salary levels that employers have to worry about in order to comply with overtime laws--employers can also be required to pay overtime to employees based on the duties their employees perform. Under the current regulations, there are complex rules for employers to follow in order to classify white-collar employees as exempt under the "duties test" (regulations specifying when workers are exempt from overtime based on what percentage of their time is spent performing certain nonprofessional tasks, such as typing, photocopying or even using the fax machine too much).

The proposed changes provide a simpler alternative, known as the primary duties test: "If non-exempt work becomes your [employee's] main duty, then you could lose your exemption and owe [back] overtime for two years," says McCutchen. Citing one case where a company settled for $30 million for assistant managers, McCutchen says: "The allegation was that the assistant managers were spending too much time actually serving customers. [The company] lost a lot of money because they had to pay all their assistant managers back pay [for two years]."

The changes should clarify these complex rules, says McCutchen, making sure there are fewer traps for unwary businesses to fall into. Businesses are expected to save an estimated $1.1 billion to $1.9 billion annually by avoiding unexpected legal costs and including liability that can occur when employers lose their overtime exemption.

Robert Wenbourne, special counsel in the Sacramento office of national law firm Foley & Lardner, agrees: "The litigation [in overtime cases] is fierce. Anything that helps employers attempt to comply with the law is beneficial."

Next Step
Get more information on the proposed changes, including a comparison of current rules with the proposed changes, on the Department of Labor's Wage and Hour Division Web site. You can also see a full summary of the changes here.

The proposed rules are open to a 90-day public comment period, ending June 30, 2003. After reviewing the comments, the Wage and Hour Division will make changes deemed necessary; if approved, the proposal will take effect late this year or in early 2004. Comments may be submitted to: Tammy D. McCutchen, Administrator, Wage and Hour Division, Employment Standards Administration, U.S. Department of Labor, Room S-3502, 200 Constitution Ave. N.W., Washington, DC 20210. You can also fax your comments (20 pages or less) to (202) 693-1432 or e-mail whd-reg@fenix2.dol-esa.gov.