Retailers prepare to deal with new overtime regulations

This article was published in the August 2016 issue of STORES Magazine.

With new federal overtime regulations set to take effect near the end of the year, retailers are analyzing their staffing and pay structures to find the most efficient route to compliance. Without action, they could see labor costs significantly rise, and experts say employers will experience a dramatic increase in administrative costs even if actual payroll costs remain the same.

“Our research shows that the managers who would supposedly benefit oppose this plan, and that few workers would actually see more take-home pay,” says National Retail Federation Senior Vice President for Government Relations David French. “There simply isn’t any magic pot of money that lets employers pay more just because the government says so.”

NRF is working closely with allies in Congress to pass legislation to require the Department of Labor to conduct further analysis before the rules can take effect or to phase them in. In the meantime, retailers have little choice but to make preparations on the assumption that the rules go into effect December 1 as scheduled.

Overtime for millions

Under the new rules, employers will be required to pay overtime to most workers who make up to $47,476 per year when they work more than 40 hours a week — more than double the current threshold of $23,660; the level will automatically increase every three years based on wage growth.

If nothing is done to block the rules, overtime will be required for an additional 2.2 million workers in the retail and restaurant industries alone, mostly managers and assistant managers currently paid a fixed salary, according to a 2015 study conducted for NRF by Oxford Economics. That would cost retailers and restaurants an additional $9.5 billion a year.

The study was based on an earlier proposal that would have set the threshold at $50,440, so the actual numbers would be slightly lower. But even if the numbers were revised, the study said current economic constraints mean few employers in any industry are expected to begin paying more overtime. Options include limiting workers to 40 hours a week or reducing base wages, benefits or bonuses in order to offset added overtime costs.

“It is unlikely that many of those workers would see their take-home pay improve simply because they gained the potential to earn overtime pay,” the report said.

NRF says requiring overtime for managers would limit their ability for advancement by keeping them from using their own discretion to put in the extra work sometimes needed to make stores successful, attend industry events or network with peers.

In fact, a survey conducted for NRF by research firm GfK found the majority of managers oppose overtime expansion, with 75 percent saying it would diminish the effectiveness of their training and hinder their ability to lead by example.

NRF Senior Director of Government Relations Lizzy Simmons says switching salaried managers to hourly will not be good for employees’ morale even if their pay remains the same.

“They’re going to have to start punching a clock and no one is going to like that,” she says. “They’ll lose some of that autonomy that comes with a managerial or salaried job.”

And those who take off early for a child’s soccer game or a doctor’s visit might not get paid the same, having to choose between making up the hours or forgoing the income, Simmons says. “It creates more unpredictability in an employee’s paycheck. They’re not going to be paid for those hours because they’re no longer a salaried employee.”

Terry Shea, co-owner of Alabama gift boutique Wrapsody, made that argument in testimony before Congress last year on behalf of NRF.

“My managers’ salaried, exempt status affords them a degree of flexibility,” Shea told the House Small Business Committee. “If one of our managers needs to leave early or run a personal errand, we accommodate them without requiring those hours to be made up. If they aren’t feeling well, we encourage them to go see the doctor.”

Steven Bercu, CEO of BookPeople bookstore in Austin, Texas, says he can’t afford to give his managers raises to put them above the overtime threshold. That means he will have to convert them to hourly and curtail flexibility in their jobs. Because many are young parents who enjoy being able to set their own hours and work remotely, he says it could potentially be a “job killer” for some.

“I can’t imagine any retailer is going to do anything other than adjust their staffing levels to create the same payroll,” Bercu says. “You don’t change your payroll because someone else thinks it’s a good idea. It has to fit in the parameters to make your business work and stay competitive.”

Weighing options

Charles Dewitt, vice president of business development for workforce management consultant Kronos, says while the regulations won’t present any “insurmountable obstacles,” retailers must weigh their options.

He says retailers should first ensure that there are no mistakes with salaried employees currently classified as exempt from overtime. Under federal law, managers and trained professionals with salaries above the threshold can be declared exempt if they meet certain requirements such as having supervision of other employees as their primary duties.

If they spend too much time on non-supervisory duties such as stocking shelves or helping customers, they can lose exempt status and have to be paid overtime. While this can be simple for a small retailer, it can be complex for a retailer with hundreds of stores and thousands of managers.

Many retailers might not know how many hours their salaried employees work and will have to find a system to measure that, Dewitt says.

“It’s more than just looking at payroll. If they’re [currently] exempt and no one is tracking their hours, you have to find out how many they typically work,” he says.

Setting up systems to track hours for employees who were previously on salary and restructuring pay systems and work protocols is expected to be a significant administrative burden. Oxford Economics estimates the costs of updating payroll systems at $874 million for retailers and restaurants, even if workers see no increase in actual pay.

A recent survey indicated only one in five small businesses were aware of the new overtime rules.

Simmons says most major retailers have human resources staff or legal counsel to help them take the appropriate course of action, but it could be a bigger concern for small retailers, many of whom have an “information gap.” A recent survey indicated only one in five small businesses were aware of the new overtime rules.

“Most small businesses don’t have an in-house HR team and I think it’s a major source of concern to ensure they get the resources they need. Our fear is by the time they realize there’s a big change coming, they’re really going to be scrambling for a solution,” Simmons says.

“Anyway you want to cut it, it’s an administrative burden for us,” Bercu says. “There’s going to be a lot more paperwork and procedures.”