With publication of the Department of Labor's final overtime rule imminent, Littler Principal Tammy McCutchen testified before the Senate Committee on Small Business and Entrepreneurship on May 11, 2016, about how the proposed changes will disproportionately and negatively impact small businesses and nonprofit entities.  McCutchen (who was the DOL's Wage and Hour Administrator from 2001 to 2004 and oversaw the last amendment to the Fair Labor Standards Act's overtime rules), fielded questions about the DOL's proposed 113% increase in the minimum salary level triggering the "white collar" exemption, possible automatic increases to this level, and the rulemaking process itself.

Although the exact increase in the minimum salary level for overtime exemption will not be revealed until the final rule is published, the DOL's proposal sets this level at the 40^th percentile of all "non-hourly" workers, or $50,440 per year.  McCutchen testified that, in theory, the purpose of setting a minimum salary threshold is to provide a "ready method of screening out the obviously nonexempt employees." A "duties" test is then used to determine which employees falling above that salary threshold qualify for the exemption once obviously nonexempt employees are eliminated.  McCutchen explained that although the DOL should therefore not set a minimum salary threshold at a level that excludes from exemption many employees who obviously meet the duties tests, the proposed rule does just that.

Many small business and nonprofit employees earning below the $50,440 threshold typically perform duties that would otherwise be considered professional or managerial. If the final rule follows the proposal, employers will have to make the unpalatable choice between giving these professional or managerial employees large salary increases or reclassifying them as nonexempt and begin paying overtime for work over 40 hours in a workweek.  Either choice places an undue and costly burden on small businesses and non-profits, which the DOL has failed to accurately quantify.  Although nonexempt employees are eligible for overtime pay, many professional and managerial employees will view reclassification as a demotion and could lose flexibility and other benefits of being exempt.

The proposed 113% increase to the minimum salary level is "unprecedented," McCutchen said, and "any reasonable method" of calculating this threshold would have yielded a much lower number. McCutchen testified that even federal employees with master's degrees have starting salaries $8,000 below the DOL's proposed threshold. Also, under New York law, the minimum salary level for exemption is only $35,000.  Moreover, she explained, it is "irresponsible" to use a nationwide salary baseline that fails to distinguish salaries by region, industry, size of business or size of city.  The minimum salary level for exemption, McCutchen stated, needs to be "set at a level that will work for high-income and low-income states; for high-profit and low-profit industries; for large, small and non-profit businesses; in large cities and small rural communities."

When asked about overall impact of the rule, McCutchen said the proposed threshold will "stifle job growth in an economy that's already sluggish." In particular, this salary level will impact full-time, entry-level management jobs as employers move to limit work hours or create lower-level part-time jobs to minimize the cost of the regulation. To highlight the regional differences, McCutchen noted that in states like Louisiana, approximately 51% of salaried workers will fall below the salary threshold and therefore be considered nonexempt, while in Massachusetts, only about 27% of salaried employees will fall below this level. As a result, the rule will disparately impact lower-wage areas.

The rule will be even more challenging for nonprofits. McCutchen pointed out these employers cannot simply raise prices to counteract increased labor costs, as they do not sell products or services, and operate on government funding and donations. 

McCutchen also educated the Committee on other ways in which the proposed rule is unsound. Among other criticisms, the DOL's required economic analysis of the rule's impact on business "grossly underestimated" the time it will take employers to comply with the rule. Moreover, the cost to businesses will be even higher if the minimum salary level is automatically increased or the duties test is changed.

During panel questioning, Senator Tim Scott (R-SC) focused on the DOL's compliance predictions, and asked McCutchen about the practical considerations associated with reclassifying an employee from exempt to nonexempt.  McCutchen said doing so "is at least a six-month process . . . you don't just flip a switch. It is a huge and complex process that the DOL thinks is going to take an hour."

This compliance burden would be exacerbated if the final rule includes an automatic annual salary level increase, which McCutchen said was "unprecedented in the 77-year history of the FLSA."  If the automatic increase comes to pass, employers will have to conduct an exemption analysis every year.  The DOL's cost and compliance estimates did not take this yearly burden into consideration, she said. 

Another detrimental outcome of the rule McCutchen and other hearing panelists mentioned is the loss of status and benefits salaried workers enjoy. The flip side of employees not receiving overtime for working more than 40 hours in a week is that those employees are not paid less if they work fewer than 40 hours. This provides employees with a great deal of flexibility. In addition, many salaried employees would consider it a demotion to be reclassified as hourly. A panelist testifying on behalf of the National Restaurant Association said such a move would be "demoralizing."

Subcommittee Chair David Vitter (R-LA) questioned McCutchen about the agency's actions in crafting this rule. When asked what would have happened if she were still with the DOL and had received the letters that Labor Secretary Thomas Perez received in connection with the proposed rules criticizing the proposal and asking for more time to submit comments, McCutchen responded, "we would have sent our economists back to work." McCutchen underscored the need for accuracy in the rulemaking process, and noted that when she was developing the 2004 rule, the DOL did grant a comment extension and gave more time for employers to comply with the rule. By contrast, for the current rule, more than 3,000 requests for an extension were made, none of which were granted. Moreover, the 90-day comment period "is incredibly inadequate."

McCutchen concluded her testimony by emphasizing the rule "will not result in giving America a raise." Employers will simply adjust in other ways, she explained, such as by demoting their salaried employees to hourly, having them clock in and out, closely monitoring their hours, decreasing their workplace flexibility, and taking away bonuses and other benefits."

"The one thing small businesses cannot do is redistribute money they do not have."

A complete list of panelists and links to their testimony can be found here.