The proposed changes to the Fair Labor Standards Act’s (FLSA) overtime rules were a hot topic on the minds of retailers at the National Retail Federation’s Committee on Employment Law meeting, which was held on April 21–22, 2016. At the conference, Elizabeth S. Washko, Office Managing Shareholder of Ogletree Deakins’ Nashville office, moderated a panel discussion on what retail companies are doing now to prepare for the coming changes to the FLSA’s overtime regulations. On the panel with Washko were in-house counsel from four major retailers with operations throughout the United States, representing both brick-and-mortar, as well as online, retailers. Representatives from other retailers in the audience also shared their concerns and tactics. During the lively panel discussion, the presenters fielded the following questions from the moderator and shared the struggles they face as well as their strategies to handle the forthcoming regulations:

Has your company taken any concrete action in anticipation of the regulation changes? Can you share some of the concrete steps you have taken in advance of the regulations being finalize?

All of the panelists reported that their companies had conducted some form of basic financial modeling to try to determine the financial impact of the proposed overtime regulations on their businesses. Retailers in the audience also indicated that they had performed some type of modeling as well. Among the projections retailers said they had conducted was estimating the costs of bringing all their exempt employees up to the new salary minimum, assumed to be approximately $50,000 per year, and of reclassifying some or all of those employees below that threshold as nonexempt employees and paying them overtime.

Because exempt employees are not typically required to track their hours, estimating the number of hours they work is a difficult task. Several of the retailers estimated hours based on store hours to conduct this analysis, while one used building badge swipe information. All of the panelists reported having difficulty estimating the amount of time exempt employees, particularly store managers and assistant store managers, spend outside of work emailing, texting, and calling employees to ensure staffing levels and problem solve.

The panelists reported that their financial modeling had indicated that the cost of complying with the proposed overtime rule would be anywhere from $7 million to $14 million, with the most expensive route being bringing all exempt employees up to the new salary threshold. Several of the panelists reported that they had shared these projections with the highest-level executives of their companies, given the enormity of the potential impact of the changes.

Has your company made a decision on how to handle the potential salary threshold increase once it goes into effect—increase pay across the board to bring everyone up to the minimum, reclassify positions, create hybrid options? Instead, is your company waiting to see what the final regulations hold?

None of the panelists reported having a concrete plan of attack for dealing with the proposed changes. All of the retail panelists reported that they are waiting to see what the final regulations contain before making any final decisions. They shared that they are struggling with issues like geographic differences in pay and pay compression, as well as the impact the changes will have on employee relations and incentive programs. 

In addition to simply reclassifying employees as nonexempt or bringing nonexempt employees up to the new salary threshold, several of the panelists reported that they have also modeled using more part-time workers in newly nonexempt positions, as well as having different levels within the same job title, e.g., having both exempt and nonexempt store managers. One panelist reported that the company is considering having different levels of management and compensation based on the volume of sales at the different stores. This would also enable the company to better account for geographic differences in pay.

When asked by a retailer in the audience whether they were considering using a fluctuating workweek model, none of the panelists or other audience members indicated that they were considering using that model as a way to reduce overtime costs. Retailers cited concerns about the perceived difficulty of memorializing an employee’s agreement to a fluctuating workweek, the potential employee relations issues that could be created by using this method, and the difficulty in administering the methodology and dealing with bonuses.

How are you addressing the possible changes to the duties tests? Are you doing anything to figure out how much time managers are spending on exempt and nonexempt duties?

All of the panelists, particularly those with brick-and-mortar operations, reported great concern over the possibility that the duties tests could be modified along the lines of the test used in California. Several of the panelists with operations in California reported that they already have had to reclassify managers as nonexempt in that state in order to comply with California’s rigorous duties test. One panelist reported that the company’s payroll in California is now its highest in the country as a result. Of utmost importance was the projected negative impact a change to the duties test will have on the profitability of stores since many store managers and assistant store managers are incentivized to grow store sales through their receipt of bonuses based on the volume of store sales.

In terms of preparing for changes to the duties test, the panelists reported that they are evaluating their job descriptions and trying to get a handle on the tasks performed by managers and how much time they are spending on each task. One panelist from a large retailer suggested that retailers could use an outside company to perform a time study to determine the amount of time managers are spending on exempt tasks versus nonexempt tasks.

How are you planning to deal with the morale issues that could arise as a result of changes that need to be made to comply with the overtime regulations?

Negative employee morale was one of the biggest concerns cited by the panelists. As the panelists explained, reclassifying managers as nonexempt would require that they start tracking their time and meal breaks, which managers might find to be denigrating. It likely will also have an impact on all sorts of company policies, including a number of policies that apply only to exempt managers, such as the ability to work from home and the ability to access email remotely. One audience member reported concern with the impact reclassifying managers as nonexempt could have on campus recruiting and the company’s ability to attract bright, ambitious college graduates to work for the company if the company will not have exempt management positions.

On the positive side, one of the panelists suggested that the coming changes could offer a unique opportunity to companies to address lingering wage and hour issues without calling attention to them. Another panelist recounted a company’s positive experience that came about as a result of an analysis the company had conducted in preparing for the coming changes. During the analysis the company discovered that it had misclassified a group of employees, who it then reclassified. Because the employees in the reclassified group were younger members of the “millennial” generation, the company emphasized the work-life balance benefit that would result from working a regular workweek and avoiding overtime hours. As a result, the reclassified group did not view the switch to nonexempt status as a negative development.

What steps have you taken to prepare your internal clients for the upcoming changes? Do you have any suggestions for others to use in effectively communicating with internal clients about these changes?

All of the panelists recommended that in-house counsel and senior human resources executives begin to educate senior management about the proposed changes as soon as possible, particularly with regard to the projected costs of compliance and the impact on employee relations as well. Several of the retail panelists reported having difficulty convincing senior management that changes are imminent. They reported that many in senior leadership positions seem to be in denial, believing that the changes somehow will not go into effect. Nevertheless, the panelists emphasized the need to start educating them and obtaining their buy-in to possible changes. In addition, they pointed out that there are many stakeholders who will be affected by the changes—payroll and timekeeping, human resources, benefits and compensation, as well as senior leadership—all of whom need to be brought into the discussion to ensure that the company’s response to the changes will be implemented effectively.

Key Takeaways

As the panel discussion made clear, complying with the coming overtime changes is going to be a difficult task for retailers. While none of the retailers on the panel or in the audience claimed to have all the answers, they all suggested that retailers start preparing now for the changes. Our January 2016 article, “Preparing for the Upcoming Amendments to the FLSA Overtime Regulations: A Toolkit for Retail and Hospitality Employers,” provides further information on what retailers should be thinking about and doing now to prepare.