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Small Manufacturers: Dealing with the New Overtime Rules Challenge

In order to comply with the new rules, small and mid-tier manufacturers may opt to increase salaries or cut OT hours and increase workforce productivity, among other strategies. For many, there will be a wait-and-see approach while absorbing the initial shock.

Q3 2016
Earlier this year, the U.S. Department of Labor announced a new overtime rule that increases the salary threshold for receiving paid overtime from less than $455 per week to $913 per week (from $23,660 to $47,476 a year) under the Fair Labor Standards Act’s minimum wage and overtime protections. The government estimates the new rule, effective December 1, will affect 4.2 million workers who are not currently eligible for overtime.

Previously, employees were excluded if they were salaried, earned at least $455 per week ($23,660 per year) or were in positions classified as executive, administrative, or professional. The new rules remove those exemptions. That pay threshold will be updated once every three years, based on increases in the Consumer Price Index.

Testifying before the House Committee on Small Business, Rosario Palmieri, vice president of Labor, Legal and Regulatory Policy for the National Association of Manufacturers, said that “could lead to another substantial increase in only a few short years.”

The rule also will raise the “highly compensated employee” threshold from $100,000 to $134,004, and bonuses and incentive payments can now count for up to 10 percent of an employee’s salary.

To comply, employers can increase salaries above the threshold, pay overtime, or cut back on overtime hours, said Alexander Passantino, a partner in the Washington law firm Seyfarth Shaw and the former acting administrator of the Labor Department’s Wage and Hour Division. Ultimately, there is no single answer. It will more than likely be an all-of-the-above approach that many employers will initially struggle through. Bart Kelly, principal, Crowe Horwath’s advisory services

However, employers have several other options beyond increasing salaries, paying overtime or reducing overtime hours, says Bart Kelly, a principal with Crowe Horwath’s advisory services. “One alternative is to set the hourly rate inclusive of the total estimated hours and build in the anticipated cost of overtime hours,” Kelly says. Other strategies “more in line with optimizing tasks and processes include automating or offloading transactional-based activities, identifying and eliminating non–value-added activities, and truly taking a critical eye in defining core activities and responsibilities to minimize tertiary activities,” he adds. “Ultimately, there is no single answer. It will more than likely be an all-of-the-above approach that many employers will initially struggle through.”

For employers, the new law will mean adding costs, with the same-size workforce, according to Barry Wilson, a partner in Crowe Horwath’s audit services who specializes in working with manufacturers. “Because you’re making that workforce more expensive, you’ll need to make that expensive [workforce] more productive, as productive as you can,” Wilson says. This will pose a particular challenge for small manufacturing companies. “In a small manufacturing environment,” Wilson says, “you already are pretty lean and you’re not going to have much flexibility to make changes. But you are going to be forced to reduce the hours of your mid-management level people so you don’t have to pay overtime.” So, the new law is “really going to be a burden for small manufacturers.”

The typical small manufacturer will have to choose among several strategies: add another middle manager, to keep everyone’s hours under a certain threshold, or reduce hours among their existing middle managers, Wilson says. Some companies may opt to switch some employees from salaried workers to hourly. …you already are pretty lean and you’re not going to have much flexibility to make changes. But you are going to be forced to reduce the hours of your mid-management level people so you don’t have to pay overtime…(the new law is) really going to be a burden for small manufacturers.” Barry Wilson, partner, Crowe Horwath’s audit services

Another strategy would be shifting some routine “transactional” tasks — as opposed to knowledge-based activities — from middle management to lower-level employees, Kelly says. Generating reports is one example. “Typically, you are paying managers for knowledge-based activity, versus transactional functions. The problem is, the amount of work they are doing (collectively) doesn’t go away. So you will have to try to make the decision as economically, and in the best interests of the organization, as you can.”

One typical strategy to offset increased overhead — passing costs on to customers by raising prices — won’t be feasible in this case, Kelly points out. So manufacturers will have to monitor their total overhead spending “to make sure it will be about the same number as it currently is.”

Employing another strategy to compensate, reducing production costs, would be a challenge for most small and mid-sized manufacturers since most companies are “already pretty lean,” Kelly says. The development of the “mobile office” has made tracking the hours of middle managers more challenging for companies, Kelly explains. “With the advent of mobile e-mail, everyone takes their job home with them at this point, especially in the mid-management space. How are you going to start tracking all that time people spend responding to e-mails and phone calls? There’s not a lot of transparency in how much time is being spent on those activities. Right now, I don’t think there are any good solutions.”

The Legality
As is the case with most new laws and regulations, the overtime change will be tested in court. “We’re probably going to see a number of lawsuits arise out of this,” Kelly predicts. “You’ll have employees contending ‘I worked for 48 hours and only got paid for 40 hours.’”

Kelly says one manufacturer he spoke with plans to reduce hourly wage rates to keep total labor costs at a certain level. “A number of these companies track how much time employees are spending (broken down by types of tasks), so as people end up working extra time, there will be disputes. Whether it’s a matter of 42 hours per week or 44 or 46, we will probably see employment lawyers going after companies on behalf of employees to get reimbursement for those extra hours.”

Smart phone technology might provide a solution to track those “extra” hours, Kelly notes — “some sort of I-Phone app people can use to track those additional hours. With these types of middle-manager positions there will need to be some type of methodology.”

For the time being, Kelly says, mid-tier and small manufacturers with whom he has spoken are taking a wait-and-see approach. “I don’t think anyone is proactively saying, ‘Here is what our strategies are going to be.’” For now, the new law “is just going to be a shock to the system, until everyone can fully see what the impact will be.”

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