Return to Virginia Business - October 2004

Overtime
Businesses sort out new rules on when to pay

by Joan Hennessy
Virginia Business
October 2004

The biggest overhaul of overtime rules in more than 50 years - and a legislative challenge to block them - has not changed the reality of hospital life for Karen Drenkard. “If a nurse calls in sick, we have to replace them,” says Drenkard, vice president for nursing at Inova Health System in Northern Virginia. “Patients need care.” For nurses, this traditionally means overtime, viewed as both a perk and a necessary evil for the night hours and 12- to 16-hour shifts required by the profession.

Yet the exemption of registered nurses and many other white collar professionals from overtime pay has sparked an election-year fight, with the House voting to block the new rules last month, President Bush threatening to veto the block and businesses scratching their heads on whether or not to implement the changes which took effect on Aug. 23. As Virginia Business went to press, the White House indicated that Bush would veto a larger bill containing billions for worker training in 2005 if it included the House’s amendment to block the new overtime rules. If elected, Democratic presidential nominee John Kerry says he will repeal the rules, characterized by Democrats as a hit in the wallet for working- and middle-class voters. The changes, counter Republicans, update outdated laws and extend eligibility to more than a million lower-paid workers.

While the political theatre plays out, the health care industry is struggling with a nursing shortage, and Inova plans to continue paying its nurses for overtime work. “We are more generous than the law requires and do not expect to change that practice,” says Laurie Dalton, senior director of compensation and benefits for Inova Health System.

Even without the legislative battle, many businesses were having trouble digesting the major changes to the Fair Labor Standards Act. The new rules tweak white-collar exemptions that have been on the books for years. For instance, funeral directors, journalists and accountants who sometimes work into the night, no longer qualify for overtime - one and a half times the normal hourly wage for work exceeding forty hours a week. Yet, cooks, some paralegals, clerks and bookkeepers are eligible.

Expected to affect millions of workers nationwide, the changes have prompted everything from union protests to managerial debates as the workplace responds to an attempt to update and clarify just who is entitled to overtime. The restructuring of rules initially passed by Congress in 1938 and changed very little since the ‘70s had the support of business lobbies, including the U. S. Chamber of Commerce and others seeking guidance in the information-age. “How do you clarify [overtime regulations] for a Web master?” asks Michael Eastman, director of labor law policy for the U.S. Chamber of Commerce.

The regulations are more “user friendly,” says Karen S. Elliott, an attorney specializing in labor and employment law at McCandlish Holton in Richmond. “More than 50 percent of administrative employees are misclassified,” she adds, and the new regulations will help in classification disputes.

The revision broadens eligibility in terms of annual pay. Previously, businesses paid overtime to anyone earning less than $8,060 annually. The new threshold has been bumped to $23,660 annually, or $455 per week — the only provision that won House approval and can be enforced. The regulations also provide more guidance by defining specific duties that exempt some administrative and white-collar workers from overtime. And they create a special category for “highly compensated employees,” with those earning $100,000 a year exempt if they perform at least one of the duties of an executive, administrative or professional employee.

The U.S. Labor Department expects the changes to reduce legal squabbles over pay. During a Senate hearing earlier this year, Secretary of Labor Elaine Chao testified that more than $2 billion annually is spent on lawsuits over white-collar disputes. The new rules will reduce overtime violations, the labor department says, saving businesses $252 million a year. However, the rules do impose some costs as well, for one-time implementation and for audits recommended to review job classifications.

Potential savings for business rather than more money in the pockets of workers have drawn union protests. One analysis funded by the AFL-CIO and performed by three former Labor Department officials estimates that the new rules could exempt as many as 53 million more workers or about 40 percent of the total U.S. work force. The Labor Department counters that the regulations will strengthen benefits for 6.7 million workers, including 1.3 million low-wage workers who weren’t eligible for overtime under the old rules.

One skeptic of the government’s estimates is Ross Eisenbrey, vice president and policy director of the Economic Policy Institute, a Washington, D.C., think tank that receives funding support from labor unions. “They [the rules] will make a difference. That’s why businesses have lobbied so hard for them. ... Why are they all for it if it’s not going to be saving them money?”

Getting the greatest value out of employees is a concern for businesses, observes Peter Thompson, director of operations for Strategic Employee Benefit Services of Virginia. “That’s not to say there is no value for an employee working overtime, but ... given the environment that we’re working in, for an employer, there is a cost factor there that becomes exponential. That’s the case for large employers as well as small employers,” he says.

Payroll, he explains, “is by far the largest expenditure. Second to that are benefits. With double digit increases in benefits, that can easily take up a huge portion of revenue within the company.”

One advantage of the new rules is that they spell out “objective standards” for businesses, taking the guesswork out of who qualifies for overtime, says David Namura, manager of state affairs at the Society for Human Resource Management in Alexandria. “It takes a lot of the potential error out.” Under the new regulations, employees can be exempt if they perform duties described under various categories, including administrative, executive, professional, computer or outside sales. An executive employee’s “primary duty is management of the enterprise ... or of a customarily recognized department.” An executive also must direct the work of two or more employees or the equivalent.

Still, many changes have been controversial. In the exempt category is a “learned professional,” defined as someone who possesses “the appropriate academic degree.” The category includes registered nurses licensed by a state board who earn more than $455 a week. But the regulation also says employees performing “substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction” also qualify.

While the changes open the doors for employers to exempt some workers from receiving overtime, that doesn’t mean they will. Eighteen states (not including Virginia) have laws “more generous” than the federal overtime regulations, says Namura. In fact, some businesses don’t anticipate any impact from the new rules.
Jerri Dickseski, director of communications for Newport News shipbuilder Northrop Grumman, says, “We were already adhering to the changes.” The new regulations simply reinforce case law that the firm already had followed.

To ensure that companies comply with the new rules, employment law experts recommend an audit. KinderCare, the nursery-school/day care operator, has already done one. The firm, which operates 50 KinderCare Learning Centers and four Mulberry Childcare and Preschool centers in Virginia, has taken “a conservative approach on position assessments,” says Jill Eiland, director of government and public relations for KinderCare. “We audited all of our positions and ended up having to make few changes whatsoever.” With 27,000 employees nationwide, “what you don’t want is a wage and hour audit,” adds Eiland.

For employees, the big picture isn’t just about pay, but quality of life. “In general, the younger generation, particularly nurses with families, would rather have their time,” says Drenkard, Inova’s chief nurse executive. “They have a life beyond work.”

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