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New OT rules pose challenges for small businesses

USA TODAY logo USA TODAY 5/25/2016 Scott Goss

Jordan Whaley, a 33-year-old assistant manager for Grottos Pizza in Middletown, Del., averages about 50 hours a week. Grotto Pizza and other businesses are facing a tough choice about how to handle middle managers in light of the Obama administration's new overtime rules. © Jennifer Corbett, The (Wilmington, Del.) News Journal Jordan Whaley, a 33-year-old assistant manager for Grottos Pizza in Middletown, Del., averages about 50 hours a week. Grotto Pizza and other businesses are facing a tough choice about how to handle middle managers in light of the Obama administration's new overtime rules.

WILMINGTON, Del. — The Obama administration's new overtime policy unveiled last week updates a long-standing exemption that allows employers to avoid paying overtime wages to executive, administrative or professional employees. The new rules will boost pay for up to 4.2 million workers nationwide who are currently excluded from receiving one-and-a-half times their regular pay for working more than 40 hours a week.

For Ryan Davis, who works about 50 hours a week as an assistant manager at a Grotto Pizza in Rehoboth Beach, Del., he could be eligible for overtime pay starting Dec. 1.

During the summer he works up to 70 hours, but as a salaried employee, his paycheck is the same no matter how many hours he puts in.

"I would definitely benefit from that," the 26-year-old said. "I think it would be something like another $500 in my paycheck."

In announcing the new rules, the president said, "This is a step in the right direction to strengthen and secure the middle class by raising Americans' wages. When workers have more income, they spend it — often at businesses in their local community — and that helps grow the economy for everyone."

While workers like Davis may benefit, trade groups and labor leaders in Delaware are divided over whether the new rule will be a boon for the economy or just another costly regulation for small businesses, which employ about half of the state's private work force.

"Anytime workers can get a raise, that's good news," said James Maravelias, head of the Delaware AFL-CIO. "I'm sure businesses are going to think of 101 reasons why it's going to hurt them, but I don't see this being a detriment to anyone."

Richard Heffron, president of the Delaware State Chamber of Commerce, said he agrees federal overtime rules needed to be updated to keep up with inflation. But he said the changes announced last week will impose too great a burden, too fast.

"What businesses like is certainty and this rule means that all of a sudden they're facing this big additional cost," he said. "If it were imposed over time, I think it would have been a lot easier for small businesses to adjust."

Many local businesses say they're still grappling with how to deal with the changes, which go into effect on Dec. 1 — during the holiday shopping season.

Tough choices ahead

Currently, U.S. businesses can avoid paying overtime to certain salaried employees who earn more than $455 a week by classifying them as a "manager." At an annual salary of $23,660 a year, that pay puts a family of four below the federal poverty guideline with no means of earning extra income by working more hours.

The regulations issued by the U.S. Labor Department last week will double that threshold to $913 a week. That means salaried employees who earn less than $47,476 a year — from fast food and retail supervisors to bank branch managers — will soon qualify for overtime. That's about $57 per week less than the proposed rules released in draft form last year.

The current threshold covers about 7% of full-time, salaried workers. The new rules would lift that ratio back to 35%, raising aggregate pay by $1.2 billion a year over the next decade.

The change represents the first time the federal overtime rules have been updated since 2004. The new regulations require that the threshold now be updated every three years, while pegging that increase to the 40th percentile of full-time salaried workers in the U.S. Census region with the lowest incomes. That means the threshold could rise to more than $51,000 on Jan. 1, 2020, according to the White House.

Several business owners said they are now facing four basic options for dealing with the new rules: They can hike managers' salary to keep them exempt from the new rules. They can make no changes and simply pay out the overtime to their managers. They can shift those salaried workers to an hourly wage and hold them below 40 hours per week. Or they can hire part-time workers without benefits to cover the overtime that was previously worked by those managers.

Rada Paul Rada, chairman of the Delaware Hotel & Lodging Association, said the new rules pose a particularly difficult problem for small businesses.

"Larger businesses are in a better position to handle these things, but for us small guys paying a ton of overtime is not something we can afford," he said.

For small shops, the National Retail Federation predicts the majority of store managers will see a loss of hours, rather than a bump in pay.

"With the stroke of a pen, the Labor Department is demoting millions of workers," said David French, the trade group's senior vice president.

Grotto Pizza, which operates 23 locations in three states, is still trying to figure out which of those options makes the most sense, said human resources director Glenn Byrum.

The company employs about 1,300 workers at the height of the summer season; about 3% are impacted by the new overtime threshold.

"It definitely poses a problem for us," said Byrum. "It's either going to cost more money or we'll need to have some sensitive conversations with some of our key staff about why we're cutting back their hours."

More with less

Overtime has become a sore subject for many managers and assistant managers in recent years. Workers with Chipotle, Dollar General, JPMorgan Chase, Bank of America and Wells Fargo have filed suits against their employers, claiming their overtime hours are spent doing the same work as hourly staff.

Rada said he understands how not being forced to work extra hours with no extra pay will be a big plus for some salaried workers. But, the general manager of the Clarion Hotel The Belle near Wilmington, said the new rules means "somebody is going to have to do more with less."

"I think for us little guys, everyone is going to have to come up with their own way to handle it, whether that's adjusting schedules or adding part-time staffers," he said.

Bob Older, president of the Delaware Small Business Chamber, questioned the assumption that the rule change will be a boon for the economy.

"Consumers are going to be hit just as hard because the only way businesses can pay for this is by raising prices," he said. "I think it's going to wind up costing people more money than the bump in pay they might get in which case it will hurt the very people it's trying to help."

Other business owners offered a more optimistic view.

"I think it's great," said SoDel Concepts President Scott Kammerer, whose company operates eight Sussex County, Del., restaurants, with a ninth on the way.

"We're all for everything that helps the community and the people in it," he said through a spokesperson. "And we support anything that's going to make the country stronger."

Contributing: The Associated Press. Follow Scott Goss on Twitter: @ScottGossDel

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