A proposed overtime rule may significantly increase compensation costs for businesses

New regulations proposed by the Department of Labor could have a significant impact on the wages paid by many small businesses in the area.

The Biden administration wants to increase the amount of overtime compensation that employers are required to pay to certain salaried workers.

“It’s a very delicate situation for a lot of employers and it could radically change their pay structure,” said Matthew Luber, a managing partner at McOmber McOmber & Luber, a New Jersey-based corporate law firm.

Under the current provisions of the Fair Labor Standards Act, any salaried workers with certain job titles and duties and that earn a salary that’s more than $684 per week ($35,568 per year) are not entitled to be paid overtime for any hours worked past 40 in a week. These exempt employees are usually in administrative, professional, or executive positions.

The Department of Labor has proposed changing those wage limits to $1,059 per week, or $55,068 per year and then index this amount for inflation every three years. The rule, which could affect as many as 3.6 million workers across the country, will also better define responsibilities for the executive, administrative, or professional employees who would be entitled to overtime pay.

“For over 80 years, a cornerstone of workers’ rights in this country is the right to a 40-hour workweek, the promise that you get to go home after 40 hours or you get higher pay for each extra hour that you spend laboring away from your loved ones,” said Acting Secretary of Labor Julie Su in a statement. “I’ve heard from workers again and again about working long hours, for no extra pay, all while earning low salaries that don’t come anywhere close to compensating them for their sacrifices.”

The proposal from the Labor Department faces stiff headwinds. A similar rule proposed during the Obama administration to increase the upper level of wages eligible for overtime pay to $47,476 annually was contested in court by various business groups and ultimately abandoned after the Trump administration took over in 2017. There’s also concern whether or not Su, who as acting secretary of labor has not been formally confirmed by the Senate, has the authority to implement such a change.

If the rule does become official — and there’s no date yet for when this will happen — businesses will need to brace themselves for more compensation costs to make sure they’re in compliance.

Some employers may choose to cut the hours of salaried workers or put in place more stringent requirements for allowing overtime. Others may choose to raise the wages of some employees to make them exempt from the rule or may instead decide to replace existing salaried workers with lower paid alternatives, or even lean more on technology. Regardless, it will continue to be very important to make sure that hours worked are being correctly monitored — and wages correctly calculated.

For example, Adam Garner, an attorney at the Garner Firm Ltd. in Philadelphia, advises employers not to average the hours worked throughout the year.

“If an employee works 45 hours in one week and 35 hours in another week, they’re still entitled to overtime for the hours worked over 40,” he said.

Luber said that because the regulations do not provide “concrete” guidance, it’s now more important than ever to keep accurate time records of workers and to review the classifications of all employees and make sure they’re in the right “buckets” because things may have changed thanks to the pandemic.

“For example, outside sales people were usually exempt from the overtime rule because they were visiting customers, but maybe they’re not doing that as much anymore and so their jobs may now be more like inside sales people, who are generally entitled to overtime,” he said. “You need to have written policies, and these policies should be reviewed regularly by an experienced labor attorney.”

Both Luber and Garner warned that employers who don’t follow the regulations may find their employees reporting them to state or local labor departments who are required to comply with the federal rule.

“An employer who violates the Fair Labor Standards Act is liable to the employee for the wages owed, plus an equal amount of liquidated damages, plus attorney’s fees and costs,” said Garner. “And so the penalties for noncompliance can be significant, and they can be even more significant if large groups of employees are being treated consistently as this could result in a collective action against the employer.”

Gene Marks is the founder and president of the Marks Group, a small-business consulting firm based in Bala Cynwyd.