ADVERTISING SUPPLEMENT TO ALBUQUERQUE BUSINESS FIRST TABLE OF EXPERTS. understanding the new OVERTIME RULES SPONSORED BY

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1 ADVERTISING SUPPLEMENT TO ALBUQUERQUE BUSINESS FIRST understanding the new OVERTIME RULES SPONSORED BY

2 14 ALBUQUERQUE BUSINESS FIRST ADVERTISING SUPPLEMENT TO ALBUQUERQUE BUSINESS FIRST THE PANEL Shannon Mick Shannon Mick is a seasoned HR senior executive. She is a Senior HR Consultant with Valliant Consulting Group. She helps organizations create best practice HR departments and unique workplace cultures based on values and performance. She works with organizations to provide strategic leadership and Human Resource Direction to business partners in organizations. She conducts assessments and formulates recommendation to help organizations move to understanding and maximizing the Value Proposition in a People Centric cultures. Serves as a subject matter expert in HR and advisor to leadership teams implementing strategic people solutions. Her experience includes Turnaround Organizations, Health Care, Higher Education, Non-Profit, Government, Financial Organizations, Native American Tribal Government, Retail Operations, Native American Enterprise Operations, Housing Authorities, Utilities, Hospitality, and Casinos & Resorts. Ms. Mick has her MBA and is a Certified Compensation Professional. She is a graduate of Stanford Executive Leadership Program, a faculty member for NeighborWorks and a Board Member of the YMCA. Quentin Smith Quentin Smith is an attorney in the law firm of Sheehan & Sheehan, P.A., where he focuses his practice in employment and labor law and general civil litigation. He has successfully defended small and large employers against many types of claims, including discrimination, harassment, and wrongful discharge. He also advises employers on personnel matters, wage and hour issues, and compliance with federal and state law. Mr. Smith is certified by the New Mexico Board of Legal Specialization as a specialist in employment and labor law. He is a member of the State Bar of New Mexico, and the Albuquerque and American Bar Associations and the New Mexico Defense Lawyers Association. He is admitted to practice before the Tenth Circuit Court of Appeals, the U.S. District Court of New Mexico, and the state courts of New Mexico. He has been selected as a Super Lawyers Rising Star (Employment Litigation: Defense), he is a graduate of the Leadership New Mexico CONNECT Program, and he was selected this year as a Forty Under 40 Award recipient by Albuquerque Business First. The federal government recently unveiled new that will have a massive effect on businesses across New Mexico. The change will make thousands of workers eligible for overtime posing a number of critical questions for businesses. On Sept. 22, Albuquerque Business First hosted a roundtable discussion, moderated by Publisher Candace Beeke, to give our readers key insights on the changes, how businesses can respond to them and what the new rules will mean for employers. BEEKE: The new overtime regulations are going to be substantially impactful for many businesses. Can you explain the key components of the overtime change, how it came about? SMITH: There are three key components. The one that s gotten the most attention is the increase to the minimum salary level for exempt employees. The salary threshold to qualify as an exempt employee under one of the White Collar exemptions will increase from $455 a week salary to $913 a week, which is almost exactly double from about $23,000 a year to $47,476 a year. The minimum salary level for highly compensated employees will increase from $100,000 a year to $134,004. I think these minimum salary increases have received the most attention. Perhaps the change that will have the longestterm impact over time will be that they now index the minimum salary test to an index as opposed to a hard, fixed number. So it will automatically continue to go up over time. The new salary threshold is indexed to the 40th percentile of full-time, salaried workers in the lowest-wage census region. So every three years, the salary will now automatically adjust, whereas in the past, the salary level test would be the same or would only increase whenever the Department of Labor increased it. So we hadn t had a change since The third change that happened is that the new regulation allows for a certain portion of bonuses, incentive pay, commissions to be included into the salary test. Up to 10 percent of the salary threshold can be met by nondiscretionary bonuses, incentive pay, or commissions. And those would have to be paid on a quarterly basis. So the salary could be slightly lower than $47,000, with employers having the opportunity to make up part of that through commissions and other nondiscretionary bonuses. MICK: The other thing is that most businesses have taken a little latitude in what was considered white-collar exemption. The exemption tests, themselves, didn t change, but the Department of Labor is expecting almost

3 SEPTEMBER 16-22, 2016 ADVERTISING SUPPLEMENT TO ALBUQUERQUE BUSINESS FIRST 15 Shannon Mick and Quentin Smith joined Candace Beeke in Albuquerque Business First s conference room for a discussion about. 1 million people who are classified now as exempt not to be able to pass the actual test. So one of the things organizations have to do, besides looking at the financial effects of the law, is really make sure their positions and what their people are actually doing meet one of those exemption tests and the new salary of $47,476. SMITH: The Department of Labor didn t change the duties test, so if you were properly classified as an exempt employee before, and you make more than $47,476, then you can still be classified as exempt. BEEKE: How will this affect the average business in New Mexico? MICK: What we re hearing is a lot of people think it doesn t apply to them. I m a not-for-profit, and there is an exemption for me. The law says any not for profit over $500,000 has to be part of the Fair Labor Standards Act. Because our industries tend to be small businesses, not-for-profits, service and hospitality here in New Mexico, which, based on the average wages in those organizations, will be hit harder than if we were a state that had a lot of high-tech, where the salaries were already above the $47,476. I do believe almost all of our STEPHANIE GUZMAN-BARRERA ALBUQUERQUE BUSINESS FIRST organizations will have employees that this affects. Businesses are going to have to decide to reallocate work in a way to meet the new law and their financial budgets. SMITH: On the payroll front, I think it will do one of two things. If an employer has a large number of employees who are impacted, if they are going to choose to increase those employees salaries up to the new threshold, then you can expect that payroll will increase. If you re going to convert many of those employees to non-exempt positions and try to control payroll through not having those employees work overtime, then you may see some increased hiring or shifting of tasks to other employees to try absorbing the excess work. One aspect that could affect some businesses is that there is a certain prestige that comes with being a salaried employee who doesn t have to clock in and out, doesn t have to keep track of their time. When those employees are converted to a non-exempt position, there may be some dissatisfaction with employees having to now clock in and out, whereas they had more latitude and freedom in their schedule. MICK: We, as businesses, tend to give titles, and with that came that exempt status, which allowed employees to work flexible hours, I could telecommute, I didn t have to account for every minute. And with this new law, some of those folks are going to be taken back to hourly, which will affect the way they work. BEEKE: Would an option for an employer be everybody clocks in and out even if it doesn t change the fact that some are salaried? It would be less noticeable than if half of this group of people is clocking in but the other half doesn t have to. Is that anything that you would recommend? MICK: We wouldn t, because when the Department of Labor comes in and does an audit, if you track time down to the minute, which is what clocking in and out does, it says that we treat the employees as non-exempt. So, then, you are foregoing your exempt classification. BEEKE: We ve talked a little bit about the options that employers have. What do you anticipate most businesses will do in New Mexico? MICK: What we re advising our clients right now to do is for the salaried employees, as long as they meet one of the exception tests, start looking at how many hours of overtime they are working. We have between now and Dec. 1 to implement this. Then you ve got to decide if you re going to make them hourly or raise the salary. Or the third option that the law allows is called salaried non-exempt. So I continue to pay the $35,000 that you re at, but anything over 40 hours, I pay overtime at time-and-a-half. And I think each organization will deal with it differently. Small not-for-profit and grant-funded organizations will probably end up going to non-exempt they ll keep one or two people in their executive team as exempt. The rest of them will probably go to hourly, and we will see some shifts in the workload. So maybe you take a full-time position and make it two part-time positions, so you don t have anything going over, and reallocate some of the work. SMITH: I expect that those employees who are close to the new salary threshold already, many employers are just going to bump those people up to the new salary threshold, which may be a short-sighted decision, given the automatic increases that will come in future years. But I think in New Mexico, where salaries are lower than some places on the East Coast and the West Coast, you re going to have employees who have salaries at $30,000, $35,000. It s just not going to be practical to increase those people all the way up to the new salary threshold, so I think there s going to be a tremendous amount of people who are converted from exempt to non-exempt, and those individuals will now have to record their time. You can set the hourly rate at whatever the employer wants to that the employee is willing to accept, as long as it s above minimum wage. So you may look at that and say, Well, my typical employee who was earning $35,000 a year is working 50 hours a week. So instead of converting that $35,000 to an hourly wage that equates to $35,000 in straight time, I may have to give them a slightly lower salary to build in some overtime that s typically worked by those employees. And that s the challenge for a lot of employers because they want to retain employees and not set them at an hourly rate that s going to cause them to leave. BEEKE: Any time you have a regulatory change of this magnitude, one of the major concerns is job reductions. Are we likely to see companies cutting jobs? MICK: I m hearing a little bit of it. We won t really know what that impact is until we get closer and businesses have really made the decision. But it s important to know every time we pass one of these regulations, a business does not have an increase in revenue, their grants don t go up, they don t get more money on what they do. So when we are mandated to give more, it does have to come from somewhere, so depending on each organization s expenses and bottom line in what they re trying to hit, they may handle this slightly differently. BEEKE: If the job reductions are going to happen, would you expect to see them by Dec. 1 implementation or do you think there will be a second effect after we ve lived with it for awhile and now we know the impact? MICK: I think the first round of it will happen by Dec. 1. If that is the strategy that an organization is taking, they will need to build that into their implementation and communication plan with their employees. SMITH: I think you ll see some job reductions as you look and you say, I ve got five people that are going to have to get increased up to the new salary threshold. I can only now afford four of those people, and so those people are going to have to work harder, and I m going to have to lay somebody off. But I think what you ll also see is some hiring increases as employers look at it and say, I m converting a bunch of people to non-exempt positions who were working 50, 55 hours a week. I can t afford to pay their overtime now, so instead of having all of these full-time employees in these non-exempt positions, I m going to be filling these with part-time employees or employees who work less than 40 hours a week but the same amount of work and effort has to be done. Now, whether that s good or bad for the economy it is sort of a soft layoff for some people who may start to earn less. There may be more jobs that are lower paying. BEEKE: Quentin, I want to touch on something you mentioned a few minutes ago that it might be short-sighted to take an employee who is near the $47,000 and just bump them up. Can you speak more to that?

4 16 ALBUQUERQUE BUSINESS FIRST ADVERTISING SUPPLEMENT TO ALBUQUERQUE BUSINESS FIRST SMITH: Sure. Now, the new salary threshold is going to automatically increase every three years. The next increase is going to be on Jan. 1, The Department of Labor estimates that that salary will increase up to over $51,000 a year. So if you take somebody now at $47,474 and put that employee into that lowest salary slot in there, I think you have to be prepared as an employer to adjust that salary again in three years, and that $51,000 is just an estimate. I could see a scenario in which that number spirals up. If the economy picks back up, even moreso than it s doing now, then you could see salaries increase to the point that in three years, the 40th percentile could be $55,000. And so you, as an employer, are you prepared to take that individual who you ve given this salary increase up $47,000 and be ready to pay them $54,000 or $55,000 in three years? That s a pretty substantial year-over-year increase if you were to look at that, and so I would tell those employers, unless you feel confident that you re going to be in a position to do that, then now might be the opportunity while the new regulations are going into place and workers know about the new regulations, to go ahead and convert them to a non-exempt position so that you can control your payroll increases better year over year. BEEKE: How aware are New Mexico businesses about this change that is coming? And are they talking to the professionals they need to talk to about this? MICK: I believe that they re aware it s on the horizon. A lot of small businesses might still think something is going to happen and it s not going to take effect. I have a couple of clients who decided to convert early because of when their budget cycle hits on their fiscal year, so they ve decided to go ahead and make the necessary changes. BEEKE: Talk a little bit about why they think this might not happen. What could stop this rule from being implemented? SMITH: When the Department of Labor issued its proposed regulations last July, in the rule-making process, they solicit comments from anybody that s interested in what is happening and wants to have some feedback before the final rule is implemented. And many business organizations, chambers of commerce, the Society for Human Resource Management, all these entities and including those who were in favor of it, as well labor unions, workers rights organizations made thousands and thousands of comments that the Department of Labor received, and those comments affected the regulations to some degree. They actually resulted in a slightly lower salary increase than what was originally proposed by the Department of Labor. Now that the final rule has been implemented, I wouldn t expect that the Department of Labor is going to change the rule based on concerns by business leaders or these organizations. They ve had their opportunity to weigh in. There s always the political process, and we re in election season, and depending upon how the election goes, since this is an administrative rule and not a law that s been enacted by Congress, the new president coming in could decide to adjust those regulations and either reduce the salary test or do something different or roll it back entirely. I wouldn t expect that to happen if the Democrats win the election again. If the Republicans win the election, I would expect that may be something the president looks at doing. BEEKE: Is there a certain type of business or industry in New Mexico that you expect to be hit more? You mentioned retail, hospitality, are there any other sectors? MICK: I think not-for-profit is going to be hit incredibly hard from the way we pay our employees to the way we train our employees. When they move to non-exempt, you have to pay travel time to send them away, so their career development and skill development would be affected. We have a disproportionate number of small businesses, family businesses, notfor-profit in New Mexico, and those will be some of the hardest hit because they are mission-based and not always at a market rate now, and this is forcing a market rate within their organizations. SMITH: Small businesses, in particular, are going to feel the hit. New Mexico has many, many small businesses and there are many regulations that don t apply to small businesses but this will; it will hit

5 SEPTEMBER 16-22, 2016 ADVERTISING SUPPLEMENT TO ALBUQUERQUE BUSINESS FIRST 17 really all businesses. The small businesses will be hit the hardest because they don t have the excess profits and large budgets to cover these increased costs, so they re going to have to be the most creative in terms of how to deal with this. Like Shannon said, retail industries, restaurants, hotels, these are industries that we can expect will be affected. I would add many higher education institutions not the educators themselves, but the universities have a large number of administrators, assistants, graduate student-teachers that are given salaries that fall below that threshold that are going to have to be readjusted. I saw statistics that something like only 4 or 6 percent of employees in New York will be affected because they ve already got market conditions that require that their salaries are above those thresholds, but I think in New Mexico it s not uncommon to see salaries at $30,000 or $35,000, especially once you get out of Albuquerque into the rural areas, and those types of businesses will be affected the most. of unpaid overtime wages and it can result in certain additional penalties that can spiral up. So the cost of failing to convert somebody and having them misclassified, it can be fairly substantial to an employer because it can just build up over time, especially if it goes a year, two years, three years without being adjusted. I ve seen many employers that have come to me for representation after misclassification issues have resulted in a group of employees claiming that they have been misclassified and the Department of Labor will look at that and come up with $100,000 or $200,000 in back wages owed. That can put a small business out of business. BEEKE: How does technology and afterhours checking of s, texts, etc., apply to this rule? MICK: It is important with the change for organizations to rethink how their employees are currently using technology such as , smart phones and texting. If an employee is moved to hourly, employers and employees need to understand and set the expectation that any work is to be done during work hours. Employees can no longer just send off a quick note, check , respond to s or do a report when they are not working and tracking hours. SMITH: This is why employers should be leery about providing non-exempt employees with smartphones or remote access to their computers. A clear and NEED HELP NAVIGATING THE OVERTIME RULES? BEEKE: What if employers do not follow the law, what will the risks of not following the rules be? MICK: Well, the DOL, they have the right to penalize, and I believe it s $1,100 per employee for every employee you have if you are found in violation of this, and you will also be violating. So if somebody should have been nonexempt, and you re not paying overtime, you have all the back wages, plus you have the penalties that can be assessed, plus everything else against your organization. So the cost to organizations really is high. I think we have a lot of small business that tend to think, Well, they just won t find me. I have 10 employees, and they just won t catch up with me. They are already predicting the number of people that should be converted, so I believe through the DOL data analysis, they are going to be looking very hard at the areas and the types of industries we ve talked about to make sure that they have made this conversion. SMITH: Yes. If an employer chooses not to convert somebody who is earning less than $47,000 a year to a nonexempt position, and they continue to pay them a salary below that salary threshold, then what could eventually happen is that employee can bring a claim for back wages. And it becomes particularly risky when you have a large number of employees that have been misclassified, because those back wages can add up. And since the regulations require employers to be responsible for the recordkeeping, if you haven t been requiring those employees to clock in and out, then they say that they ve worked 50, 60, 70 hours a week, you have no way as an employer to rebut that, and so you can end up with some fairly large back pay owed. And depending upon whether that failure to pay overtime wages is found to be willful or not, it can extend the statute of limitations from two years to three years Quentin Smith and the legal team at Sheehan & Sheehan, P.A. are your trusted partners in helping your business navigate complex state and federal employment laws. Wage and Hour Laws Discrimination and Harassment Complaints Personnel Policies and Procedures Employment Litigation Hiring Contracts Severance Agreements SheehanSheehan.com

6 18 ALBUQUERQUE BUSINESS FIRST ADVERTISING SUPPLEMENT TO ALBUQUERQUE BUSINESS FIRST Shannon Mick and if they work more than 30 hours per week, they re considered to be eligible for medical insurance. So as we look at adding new people to pick up some of the overtime, all of those factors will play into the benefit portion of what employees are given, as well. So depending on the strategy that the business takes, it could certainly impact their indirect cost on the benefit side. SMITH: One thing to keep in mind is that, depending upon how an employer readjusts to the new overtime regulation, it may have an impact with respect to other laws that may apply to that employer. For example, with the Affordable Care Act, those employers with less than 50 full-time employees are not required to pay a fine if they fail to provide health insurance. Well, if an employer that is sort of on the edge of that decides that they re going to adjust to the new overtime rule by capping overtime and hiring more people to backfill those positions, they may find themselves bumping up over that 50-employee threshold, and they may be required to provide health insurance. Another example is the Family Medical Leave Act. The Family Medical Leave Act only applies to employers with 50 or more employees. But if an employer, again, increases their head count to address the new overtime regulations, and they bump up over that 50-employee threshold, then they re going to have to take on the obligations that are imposed by the FMLA. It s helpful for employers to take a longer view of this as an important regulation that not just affects their limited payroll but may have other impacts on their business and to take those things into consideration in making their decisions. MICK: It may have an effect on the benefits, as well, such as if you give greater annual leave, sick leave, any of those types of leaves to your exempt employees than you do your nonexempt when you convert them. I would recommend that businesses go back and look at their policy manuals to see if they ve denoted differences and what those differences will mean with the employees. Employers need to be talking to their employees right now that this regulation is coming, to put it on their radar so it s not a surprise to them. The more they can communicate with their employees, the more the employees will know part of the solution and understand what is happening and it will be an easier transition for all of them. comprehensive policy on timekeeping will help avoid potential liability for off-theclock work. The policy should require accurate timekeeping, prohibit off-theclock work and unauthorized overtime, and state that employees will disciplined for violation of the policy. BEEKE: What else should employers know about the new? MICK: It s important to know that job title alone or salary alone does not make you exempt. And so if I have a manager or a director title doesn t necessarily matter it s all about the duties. SMITH: I think we ve been fairly pessimistic, but I will say that there is one silver lining or golden opportunity. The Department of Labor estimates that something like 30 to 40 percent of employees are improperly classified. These regulations give employers the opportunity to do a full assessment of their positions to determine whether there are any employees who have been improperly classified. Whenever you have an employee who has been improperly classified and you convert them from exempt to non-exempt, the concern is am I alerting that employee that there may have been a problem with their classification before? And am I opening myself up to a claim by that employee? These regulations give you the opportunity to evaluate employees duties and make some adjustments, and those misclassification fixes can be done in conjunction with the other changes that you re making so you re not highlighting to employees that there may have been a problem with their classification before. I strongly encourage employers in the next few months to consider looking not only at those employees who are narrowly affected by the rule, but look broader, especially at those lower-level employees who have been classified under the executive or administrative exemption and dig in. Is this somebody that s really meeting the duties test? Is this somebody that if the Department of Labor comes in and does an audit that we can make a compelling case has been properly classified as exempt? And if they re not, you have the opportunity now, while there s lots of changes going on, to make those fixes without inviting litigation. MICK: The other thing that we ought to put on the radar for businesses is about payroll. We have a lot of businesses that pay twice a month. But when we move emloyees to non-exempt, it affects your payroll cycles. There are payroll implications if somebody is running on that type of cycle, so now is the time for them to be talking to their payroll processer or if they re doing it themselves to make sure that they get on a cycle that meets these new regulations. BEEKE: Are there any other major rule changes like this on the horizon that companies should be preparing for? MICK: I think the biggest one that has been on the horizon for the last couple of years is the Affordable Care Act that we continue to see additional reporting regulations that are having to be put into place on when an employee is eligible, Quentin Smith