By Kate McGovern Torone, Editor

Many employers are not prepared for new overtime regulations that take effect later this year, according to a recent report.

Littler Mendelson P.C.’s 2016 Executive Employer Survey Report found that 28% of employers have adopted a “wait-and-see” approach to the new Fair Labor Standards Act (FLSA) rule.

Tammy McCutchen, an attorney in the firm’s D.C. office and former administrator of the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD), said that such an approach is ill advised. “I do not think employers should be waiting,” she told HR.BLR.com^®.

Survey findings

The survey, which polled 844 Littler clients, asked in-house counsel, human resource professionals, and C-suite executives to share their level of preparation for the changes that take effect December 1. The rules will increase the salary threshold for the FLSA’s overtime exemptions to $913 per week, which amounts to $47,476 annually. The current threshold comes out to $23,660 annually.

The polling took place before the final rules were released in May but still found that 65% of employers were conducting audits. Twenty-eight percent, however, had done nothing.

McCutchen said she was surprised how many employers had taken no action, even considering the rules were only in the proposed stage. “We knew there was going to be a salary increase; we knew that,” she said, referring to the proposed $50,400 threshold. “It was a fairly easy thing for employers—even before the final rule—to check and see who was below that. Twenty-eight percent of Littler clients had not even done that.”

“Talking to clients now, it seems like everybody is on the move but my instinct is that there are still many who haven’t done anything,” McCutchen said. The number of employers who are unprepared probably would be higher if the survey had included all employers nationwide, not just those who are Littler clients. It’s not the employers with human resources staff, that read trade publications or that are Society for Human Resource Management (SHRM) members who aren’t ready; it’s small businesses that may not even know about these regulations, she said.

Littler’s report also asked employers whether they had:

• Raised salaries or reclassified some employees as nonexempt in anticipation of the rule going into effect (18% said they had);
• Reviewed and updated job descriptions for exempt employees (28%);
• Updated internal systems to better track hours for employees that will be reclassified as nonexempt (14%); and
• Revised or adopted new wage and hour policies (8%).

Enforcement expectations

Despite various efforts to block the rule, it likely will take effect, McCutchen said, and employers can expect DOL to be “out on the street” enforcing the provisions December 1.

Luckily, it seems that most employers realize this. Eighty-two percent of employers polled told Littler they expect DOL enforcement to impact their workplaces next year but only 31% said that impact will be “significant.” McCutchen said that number doesn’t surprise her: “DOL has limited resources.”

“To me, the significance is the jump from 18% in the prior year. I think what that tells you is that employers are experiencing more interactions with DOL than in prior years.” DOL’s enforcement numbers support that theory: “In the last five years we’ve had a significant increase in wages collected, and I don’t see any reversal in that trend,” McCutchen said; employers are becoming more and more aware that DOL is out there investigating and going after maximum damages and penalties.

Employers also probably remember how McCutchen’s WHD enforced the last overtime update in 2004. Rather than waiting for employee complaints, the department exercised its authority to initiate investigations. Employers probably are expecting that to happen again, she said.

Employer steps

DOL’s preparedness—coupled with employers’ lack of preparedness—is a problem because the reclassification process can take up to 6 months, McCutchen said in a statement accompanying the report.

“You have to look at everybody in your workforce who you’re currently treating as exempt who doesn’t meet that threshold and decide what you’re going to do with them,” she said.

If an employee is just a few thousand dollars' shy of the threshold, McCutchen says she’s seeing employers choose to increase wages. But more than that and employers are opting to reclassify.

But overall, “I don’t think—based on the clients I’ve been helping—that employees are going to see their take-home pay increased,” McCutchen said. Employers are instead creating “cost-neutral” compensation plans, ensuring that employees’ pay neither increases nor decreases.

Numbers aside, employers may find that workers are most unhappy about punching a clock and loss of flexibility, McCutchen said, adding that the full effect won’t be seen until December.

The ‘wait-and-see’ approach

If employers still want to take a “wait-and-see” approach, they should delay implementation—not preparation, McCutchen said.

Some trade associations have discussed challenging the rule in court but McCutchen said employers shouldn’t bank on that. “It’s not an easy case to bring,” and litigation is always uncertain. “Even if a suit was filed tomorrow, would they be successful in getting a stay? It’s always hit or miss,” McCutchen said.

If you want to wait and make sure the rule really is taking effect, that’s fine, McCutchen said. But you need to be ready to implement the changes by December 1.

McCutchen previously recommended that employers adopt the necessary changes during Thanksgiving week because the effective date falls on a Thursday—an indication that nobody involved ever worked in the private sector, she said. (Her 2004 rules took effect on August 23, a Monday.) Adopting the changes a few days early would allow employers to avoid reclassifying an employee as nonexempt in the middle of a workweek, which could create wage and hour problems.

That recommendation is even more important now in light of recent litigation. McCutchen said she is involved with a case in which an employer had to reclassify an employee in light of the new home care exemption regulations. Those rules also took effect in the middle of a workweek and the employer did not implement the reclassification until the week after the effective date. DOL is seeking back wages for the half a week that the employee was misclassified.

“We’re trying to talk DOL out of it because it’s going to have an impact here,” McCutchen said; but, either way, “you’ve got to get it changed before—or at least by the week that contains—December 1.”