KEVIN O’FLAHERTY: We’re joined today by a return guest I’m excited to have come back. She did our 7th episode. Her name’s Doreen Petty from Doreen Petty Coaching. If you like what you hear today, go check out episode 7 on transitions in business that she did.
But today we’ve got a really good topic to talk about. We’re going to talk about the new overtime laws that are going to go into effect in -- Is it --
DOREEN PETTY: December 1st, this year.
KEVIN O’FLAHERTY: December 1st of 2016, and they’re going to be in effect in 2017 as well. So, Doreen has some specialized knowledge on this sort of thing, and it’s a pretty complex area. So, Doreen, I’ll let you take away. Why don’t you tell me a little bit about yourself and what you do to begin.
DOREEN PETTY: Okay. My company Doreen Petty Coaching is a transitions coaching company for business and life. So the one thing that all my clients have in common is that they are creating change in their lives or their businesses, and they’re managing the transitions associated with that. So, fundamentally it’s about creating a future that people choose for themselves, professionally or personally, and then doing all the work to achieve that future.
KEVIN O’FLAHERTY: Okay. All right. So tell me about the new overtime laws.
DOREEN PETTY: Yeah, so I brought some of the documents that are available --
KEVIN O’FLAHERTY: Yeah, got a bunch of papers spread out in front of you for those of you listening on the podcast.
DOREEN PETTY: Yeah, so I’m not sure I would identify myself as an expert in this area, but I am really, really good at finding information and hopefully synthesizing it for my clients. The most important factor is that regardless of how your business is working, you have the opportunity to use the information on the federal websites for the Department of Labor and Wage and Hour Divisions. And they have all of this information available, so it’s not hidden by anybody.
But the important factors around the changes that are happening on December 1st is that overtime regulation are changing specifically in terms of who’s eligible for overtime. The last time there was an update for the eligibility of overtime it was 2004, I think. And now we’re finally seeing a change in the -- another update in the level of who’s eligible. And there are actually three eligibility tests, and then there’s also -- One of the biggest things I’ve been running into -- actually two things -- running into the issue of small business owners or any business owner that doesn’t know the details around the change that’s happening on December 1st and which of their employees may be eligible for overtime that were not before. And I’ll talk about the details of that that in a minute. But there’s also people that it doesn’t affect, and I’ll talk about that first. So, most businesses that earn revenue below the level of $500,000 a year, they’re probably not affected by this change.
KEVIN O’FLAHERTY: Really? $500,000 gross revenue?
DOREEN PETTY: Yeah. $500,000 gross revenue a year, then it’s only above that that they’re affected. Now, they are exemptions to that, which I won’t get into the details. If anybody wants to send me a message through my website later, I’ll give them more details, so they can look it up themselves. So there are exceptions. But for the most part $500,000 is the limit.
KEVIN O’FLAHERTY: So if you’re a business with a gross revenue less than $500,000, that doesn’t mean you don’t have to pay any overtime. It just means this new change to the law doesn’t affect you.
DOREEN PETTY: Absolutely. So the overtime regulations are still in effect under the old rules. The whole purpose of this -- I probably should have started -- The whole purpose of changing this is really, I think, was to expand the middle the class -- to change the level of when someone could be identified or eligible as an exempt employee to the overtime laws.
So there’s categories of employee. Exempt means they’re not required to be paid overtime. Nonexempt means they are subject to overtime and other employment laws, but we’re talking specifically about the overtime.
So the change has happened in three layers. One in terms of a duties test -- what employees do. One in terms in how they’re compensated. We’ll talk about all three of these. And the other one is in terms of the level of compensation, and that’s the big thing that has been changing that has not specifically changed. There are two different versions of this, which is confusing people. There was a proposed version of the change. And then there’s a final version of the change. And not everything rolled from the proposed to the final, which makes it a little bit more complex. That’s where a some of the complexity comes in.
KEVIN O’FLAHERTY: Okay. So should we start with the duties test?
DOREEN PETTY: Yeah, so let me talk about the duties test. So, in the duties test there are professional and administrative. Basically there’s executive too -- executive, professional, administrate. So in the administrative these are people that are not seen as potentially exempt from the overtime laws, but there are possibilities. So anybody who’s an administrative role managing people or systems or having the ability to obligate the company with a decision.
So even some HR people, who might be considered HR administrators or even HR clerks, if they have an opportunity to obligate the company in some way with their decisions, then they could potentially be identified as exempt. The important thing about that is it’s not a job title that determines whether anyone is exempt or nonexempt. It’s not the decision of a business owner. They need to meet all three criteria, not just partial criteria -- professional the same way. If somebody is able to obligate the company, that’s the easiest way to summarize the different criteria in terms of the duties test. An executive is someone who obviously runs a business or is at a high level and of course has the same ability to obligate the company in some way.
KEVIN O’FLAHERTY: So it seems like the one that would be most of gray area is the administrative. Because people know if you’re the CEO of a company, you might be working some extra hours without overtime. People understand that if you’re a lawyer, you’re not going to be paid overtime.
But I called you up about my office manager because she wanted to pick up extra hours, and neither of us wanted overtime to be involved because I couldn’t give her the extra hours if I had to pay her time and a half for it. And I did a little looking into that, and she met the administrative test and also the how she’s paid and how much she’s paid test, but you have to look at all three. And you’re right. It comes down to the duties that the administrative person has, not whether they’re titled the officer manager.
But if you’re an office manager, if you’re in charge of -- if you have a lot of managerial responsibility, like you’d expect, you might be expected to working until the job gets done if you’re paid a salary to do that.
DOREEN PETTY: Absolutely. And here’s the other thing in terms of how someone is paid. So you can pay people with a salary, or you can pay people on a fee base and still qualify under the rules.
Now, a fee base is you’re paying people for specific jobs that are being done. You still have to do the math to figure out if it meets the requirement of the salary levels that I’ll talk about next. But you can do a salary or a fee base. What you can’t do is reduce the salary in any way for any reason. If you have a reduction policy -- So for extra days off or something like that, if you’re docking pay for any reason, then you no longer meet the requirements.
KEVIN O’FLAHERTY: Then that looks more like you’re paying them by the hour that they’ve worked as opposed to just paying them for 40 hours a week to do the job.
DOREEN PETTY: Exactly, exactly. So now the big thing is the money. So the level of pay -- So what it used to be -- and I have this from one of the websites -- is that it used to be that $455 a week or something like that was the minimum that someone could earn and still be qualified as exempt. Now, it’s moving up into $913 a week of effective wages. Or that translates into $47,900 and some change -- something like that. That should be on here. No, $47,476 for a year.
Now, it doesn’t matter if someone’s paid by the week, by the month, by the year. If they’re salaried, and, in fact, somebody could be exempt and be paid weekly. Or they could be salaried on a monthly basis. I mean, there’s very few people, but some people even are actually paid annually.
KEVIN O’FLAHERTY: And so in order to be exempt, you’ve got to meet all three of these tests, right?
DOREEN PETTY: All three of the tests.
KEVIN O’FLAHERTY: So if I’ve got a lawyer who’s being paid a salary less than that $47,000 a year or not being paid on a salary, then even though they’re a professional, I’d still have to pay them overtime according to these new laws?
DOREEN PETTY: Well, a lot of lawyers are paid really what constitutes a fee-based structure. Or maybe some fee and -- maybe it’s a salary; maybe it’s partially fee, partially salary; maybe it’s commission; partial commission, partial salary. Regardless of whether it’s salary that can be tagged like commission that has to be paid back or whatever. Any of that. As long as you do the math to show it meets other criteria, it doesn’t really much matter how it’s being paid. You can still -- You don’t necessarily have to identify it as salaried. It can be fee-based and structured in that way. So it’s really about how you structure it and whether you’re doing the right thing and being fair.
KEVIN O’FLAHERTY: So the big change, as it relates to these three tests, is basically just raising the amount from -- You said $473? Was it --
DOREEN PETTY: It was like $455 or something all the way up to $913, and that’s in here somewhere too. I have it in -- So these are all documents. There’s this one. I’ll just kind of hold up the compliance guide for white collar exemptions, and there’s actually a point of fact on some of this too is that there actually is -- Someone can earn too much to be eligible for overtime.
So, this is generally for professional people who may not be on salary but earn a significant amount. And that one has moved from like $100,000 to $134,000 or something like that.
KEVIN O’FLAHERTY: So that basically means that if they make that much money even if they fail the how they’re paid test, they’re so high on how much they’re paid that they can -- The how they’re paid doesn’t matter anymore.
DOREEN PETTY: Yes. And they’re no longer eligible for overtime, and these are called high compensation employees. So it used to be -- The current regulations have it at $100,000. This is one of those points that I mentioned about the proposed changes are different than the final.
And this is one of the points where the proposed changes had it at $122,148, but the final rule is $134,004. And the reason for the weirdness on the numbers is because this is taken at the 90th percentile of full-time salaried workers in the lowest government region of average salaries according to the Bureau of Labor Statistics -- the census data that they pull together. So originally that number was 90% of all full-time salaried workers. And in the final version they restricted it to the lowest average salary region in the census.
KEVIN O’FLAHERTY: The final version is a little bit of a lower bar to meet than the proposed version would have been?
DOREEN PETTY: Actually…
KEVIN O’FLAHERTY: Or is it a higher bar?
DOREEN PETTY: It’s actually a higher bar. So someone has to earn $134,000 before they’re no longer eligible.
KEVIN O’FLAHERTY: Before they’re no longer eligible even if they meet the other -- or even if they fail the other test.
DOREEN PETTY: Yeah, so it seems counterintuitive somehow. And, again, it’s one of those complexities that I haven’t really delved into too far because none of my clients are in that space, so it doesn’t really matter. Most of my clients are very small businesses that aren’t really running into that.
So, the other thing that is changing with this is they’re -- Previously, in this rule of law, they never had a standardized process of reevaluating. It was always a legislative process. Now it’s actually being built into the law that every three years these numbers can be reevaluated. So they can change.
KEVIN O’FLAHERTY: So employers are going to need to stay on top of the minimum threshold amounts to be exempt from overtime every couple years or so.
DOREEN PETTY: Yeah. And I think it’s important to recognize that a lot of people and a lot of things that are being written about it is, “Oh, now you’re going to have to have people clocking in, and this is going to be difficult for employers.”
Well, one, for the very smallest employers, the ones that are earning lower than $500,000, it’s not that big of an issue. They are --
KEVIN O’FLAHERTY: So for employers below $500,000 in revenue, everything’s basically the same that we’ve talked about so far except it’s the lower threshold amount number.
DOREEN PETTY: It’s the old threshold that it hasn’t come into play. And there are reasons -- there are eligibility factors that would make people that work for employers not eligible for overtime or not covered by the law.
So, this is an FLSA, the Federal Labor Standards Act. This is part of that. So there are lots of adjustments; there’s lots of different pieces that could make people eligible or not eligible that somebody will have to talk to someone like me about getting their specific situation or just look it up and find the information on Wage and Hour Division pages on the Federal Department of Labor website. So it’s all there. It’s all actually -- There’s fact sheets, and there’s a lot of really good information for it.
Another point I wanted to make is that there is -- It doesn’t all have to be in the salary. There can also be -- In order to meet the criteria, up to 10% of the total wages can be in nondiscretionary bonuses. So monies that are paid out in something other than salary. And one of -- I always recommend to clients to look at a compensation strategy that uses bonuses and wages, but the thing here is these are not discretionary bonuses. These are nondiscretionary bonuses that are tied specifically to factors of work.
KEVIN O’FLAHERTY: So the employer has to pay them if they hit their key performance indicators. And it’s not just: “We made a profit. I’m deciding to give everybody a bonus.”
DOREEN PETTY: Maybe we will maybe we won’t. That doesn’t work it has to be nondiscretionary. So if certain factors are met then the bonuses are paid out.
KEVIN O’FLAHERTY: Okay. And that’s an important point because these threshold elements don’t include your Christmas bonus necessarily if it’s a discretionary bonus.
DOREEN PETTY: Right so that’s another reason to relook at policies to see what practices do you want to put in play -- into policy play so you can identify something as nondiscretionary to help support the strategy that people have for compensation. That’s going to be a big deal.
And there was -- so the other thing a lot of people are figuring out a lot of people come to me and say how do I get out of this. How do I get out of paying people overtime? Well, one, if you’re working people overtime, you’ve never had the option of not paying overtime. That has been a law for a long time. So you cannot allow overtime. That’s perfectly within the rights of employers. You can if you’re consistently working people over 40 hours a week. And that is the test by the way it’s 40 hours a week, not necessarily a pay period or a month. It’s counted as 40 hours. So, and even you have a part-time person that normally works over 25, if they work one week over 40, then they can be paid overtime. But they don’t start getting paid overtime when they work more than 25.
So those rules create complexity as well. But an employer can look at that. If they’re constantly putting more than 40 hours average per employee, then there’s an opportunity potentially to hire another employee to cover that stuff. If they’re using overtime as a way to help other people earn more money as a perk or incentive, then paying overtime may not be a bad thing in terms of how you attract the best talent for your work.
And they are other strategies that are important to look at individually for every business. What does it mean to them? How can they use it to their advantage? How can they do the right thing for their employees to help engage their employees?
One thing that I said to somebody yesterday is that their employees are not doing them a favor. Your employees are not coming to work as a favor to you. They’re coming to work because they have status in the workplace, and they’re getting a fair exchange -- a perceived fair exchange for their labor. So we look at that balance between what’s best for the business and what’s best for the employee. And part of what’s best for the business is retaining the best employees, being able to attract the best employees. And this is just another tool -- another piece of that, and it happens to be a federal law. So there is some importance to following that.
KEVIN O’FLAHERTY: Does Illinois law add any layers on top of this change, or is it --
DOREEN PETTY: No.
KEVIN O’FLAHERTY: Because I know that the federal law -- Illinois can’t reduce the amounts of overtime --
DOREEN PETTY: But they can make it harder.
KEVIN O’FLAHERTY: But they can make it easier for employees to receive overtime.
DOREEN PETTY: As far as I know, Illinois has not made any changes to make this even more stringent. Now, that doesn’t mean that there aren’t labor contracts in Illinois that might create more stringency. When I used to work in labor, they were contract stipulations that didn’t allow an employer to hire more people just for the purpose of avoiding overtime.
KEVIN O’FLAHERTY: Really?
DOREEN PETTY: Yeah. So that overtime was an important piece of some laborers. That’s money that they count on as part of their income. So some labor contacts will control that.
KEVIN O’FLAHERTY: And that’s -- With contracts generally, as a lawyer youlook at the different areas that law can come from and contracts can always supersede -- They can do what Illinois law can do to the federal law. You can’t contract away the ability to pay overtime, but you can make it more stringent on the employer.
DOREEN PETTY: Exactly. You can make it more stringent on the employer, but the employer always has the right to not allow overtime. If they contract with an agreement for overtime, then that’s a choice that the employer makes. And then once they contract it --
KEVIN O’FLAHERTY: When you say not allow overtime. You don’t mean not allow people to get overtime pay for overtime hours of work. What you mean is not allow those people to work those extra hours.
DOREEN PETTY: Exactly. Exactly. Because it’s perfectly within the right of an employer to disallow overtime work. But overtime must be approved in advance. However, that’s even a little complex.
So if you, as a boss, say to one of your employees at 4 o’clock that -- “I need you to do this job. Here. Take care of this before you leave today.” And it’s reasonable that this thing is going to take more than an hour and the employee is supposed to leave at 5, then you have approved overtime in that moment by making it clear that you said you have to do this before you leave.
KEVIN O’FLAHERTY: But if you have a rule in your employee handbook -- And by the way, you helped us with our employee handbook, and thank you for that -- If you have a rule in your employee handbook that says employees aren’t allowed to work these hours, and then an employee comes to you and says, “Oh, to get my work done I had to work an extra 5 hours this week, and I want to be paid for it by overtime.” If you didn’t ask them to --
DOREEN PETTY: No. You still have to pay it.
KEVIN O’FLAHERTY: You still have to pay it. Okay.
DOREEN PETTY: But you can then discipline them in some way. If your policy is to not to allow overtime and you’re good at engaging employees in the rules that you have for your business so it’s clear they understand what the rules are, then you can say, “Well, you violated our policy, and that can’t happen again.” Or you have follow your own practice or policy associated with disciplinary action, but you can control that. But you cannot not pay overtime when it’s worked.
KEVIN O’FLAHERTY: And one last little nuance here --
DOREEN PETTY: And people are eligible for it I should say. There is complexity around the eligibility, but if somebody is eligible for overtime and they work overtime, then the employer has to pay it. But they can control whether or not people are allowed to work overtime, but once they do, even if they’re not allowed, you have to pay it.
DOREEN PETTY: Now, if someone’s coming to me and they’re making well over minimum wage and they say, “You know what? I need to make more money. I’m sending my kids through school, and I need to pick up more hours.”
And I, as an employer, say, “Well, I can’t afford to pay overtime.” One thing we could do is factor in how many extra overtime hours they’re going to work every week and change their base compensation so that they’re still making basically the same amount per hour, but they’re able to pick up extra hours at their same rate. Does that make? Did I explain that clearly?
DOREEN PETTY: Sure. If the point is to earn more money, then there are several different options for earning more money. But it’s true that an employer can change, especially in Illinois. Other states are different. An employer can change an employee’s rate of pay at any time for any reason as long as they’re not being discriminatory under the law. That can be done without really even telling them about it. Absolutely don’t do this, by the way. But you can.
KEVIN O’FLAHERTY: And I’m not suggesting this as a way to screw your employees over. I’m saying it as a way to allow an employee to pick up more hours without having to go get a bar tending job somewhere in the evenings when an employer can’t afford to pay time and a half for those extra hours.
DOREEN PETTY: Sure. So you may not be able to pay time and a half, and if you don’t want someone working an extra job because you think it may interfere with their effectiveness or productivity on your job, then you have other options like we talked about on the phone a couple weeks ago. You look at all the options that you have to increase the pay, so they’re making the extra money. Or to change some of their work to fee-based pay that can be still beneficial and a golden thread to your business that they can do in other places.
KEVIN O’FLAHERTY: And what you’re talking about with the fee-based pay is basically make some of their job responsibilities independent contractor responsibilities. So in my office manager --
DOREEN PETTY: That’s one option. Yeah, independent. You can do a fee-based even for an employee. You can have different types of compensation for an employee. You just have to add it all up, meaning if the salary ends up meeting the exempt qualifications, then you don’t have to pay overtime on it. If it’s below, then you do, but every case is so different.
Now, you can also -- If you have a situation where you’ve got work that someone can be doing that isn’t being done by an employee elsewhere in your business, regardless of how many locations you might have, but it’s unique work, you can have an employee that’s both an employee and a contractor for the specific pay-for-purpose or outcome work.
But I still suggest -- Have a statement of work for that and clearly identify it because it is -- You have to be very careful not to treat any of that work as employee work, and you can’t have that work being done by a person who is also an employee.
KEVIN O’FLAHERTY: So, if you are able to segment off some of this work as independent contractor work, the time spent on that work would -- You’d pay a flat fee like you’d pay your IT person to come in and fix your computer, and maybe shift some of the employee’s employment work into their realm of an employee, have them do this independent contractor work outside of an employee, and that independent contractor work wouldn’t count as hours for purpose of overtime calculation.
DOREEN PETTY: Exactly.
KEVIN O’FLAHERTY: But you would have to talk to somebody like you to help you structure that.
DOREEN PETTY: Exactly. Because it is so case by case. One, you’d have to make sure that you’re not violating any of the compliance laws, and that it is work that you need to do that it’s not really a permanent job. It’s just work that you need to do that you’re willing to pay somebody to do.
I’m trying to think for an example for that. So it might be that you’ve got a law firm, but you also own a coffee shop. And all your coffee shop employees are contracted. Because maybe it’s a -- where you take coffee to businesses. It’s not a destination thing. So all of your coffee shop employees are contracted, and you’ve got an employee in your legal firm that does paralegal work or administrative work; and they’re paid as an employee, but they want extra time. You could contract them to your coffee shop.
KEVIN O’FLAHERTY: Or another example might be -- My former office manager, who no longer works as my office manager, is the person that’s typing up the transcripts for these podcasts. So if he was still my office manager, I could say, “Okay, I need these transcripts done. I’m going to pay you $200 for 4 transcripts.” And that would be a separate thing.
DOREEN PETTY: Absolutely. That’s a completely different job, because you don’t have an employee doing that. As long as you don’t have an employee doing that and that you cover the work under the statement of work that’s completely identified from the contractor on what the agreement is for them to do, how you’re going to pay, you would not pay them the same way you’d pay your employees. You would write a check for the expense, and you would have it as transcription services in your expense rate.
So that’s perfectly doable. However, I would definitely, for anybody listening -- Don’t do this without talking to somebody who knows what it goes on. Do check it out. Do have your due diligence. Do make sure that you are in compliance, and the reason I say that is a couple of years ago the Department of Labor put 30,000 feet on the ground -- or actually 60,000 feet considering everybody has two.
KEVIN O’FLAHERTY: 30,000 people.
DOREEN PETTY: So they put 30,000 investigators on the ground auditors basically, and they’re auditing small businesses all over the country. Now, there’s not necessarily rhyme nor reason where or how they’re doing that, but the difference between small businesses and big business in this arena -- these big corporations know when these audits are coming. They do their own internal audits all the time. So they know that if they are tagged in an audit, they’ve already got the work done.
Small businesses rarely are prepared for audits. The knock on the door or the letter the mail is the first they hear of it. And then they have a limited amount of time to produce whatever they need to produce. And once they’re audited they can’t change anything that’s already in their records. So either small businesses need to learn how to begin auditing themselves and being aware of what their potential compliance issues are and come into compliance with them, or they are taking a huge risk.
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Kevin owns O’Flaherty Law, a general practice law firm with locations in Downers Grove, Elmhurst, and Naperville, Illinois. O'Flaherty Law's attorneys have expertise in many areas of law including but not limited to divorce and family law; civil litigation; estate planning; business and corporate representation; commercial and residential real estate law; elder services, probate and guardianship; immigration; bankruptcy law; and dui, traffic and criminal defense.
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