Overtime Regulations Call for Restructuring
Beginning Dec. 1, the Department of Labor (DOL) estimates that 4.2 million workers will be impacted by the recently announced final ruling in overtime regulations that raise the salary threshold to qualify as exempt from overtime requirements from $23,360 to $47,476, a more than 100 percent increase.
“It’s going to be a major paradigm shift in the [automotive] industry,” says Larry Edwards, founder and president of Edwards & Associates Consulting Inc. “Based on what I’ve seen in my 22 years experience, the average worker in the industry works a minimum of 50 hours a week. Let’s say a worker is making $40,000 a year. That works out to $769.23 a week. Divide that by 40 hours a week and they’re making an hourly rate of $19.23. In order for them to work those extra 10 hours that the owner has become accustomed to, you’ll have to pay them $28.85 an hour [over those 10 overtime hours].”
Salaries vary based on position, shop and region, but according to the Bureau of Labor Statistics, “automotive service technicians and mechanics” earn an average of $37,910 per year. Those additional 10 hours per week will add up for shops and many will have to rethink the way they schedule and pay their employees.
Who Will be Affected?
Brian Farrington, attorney at Cowles & Thompson in Dallas says that the positions he believes are most often misclassified in mechanical shops are subordinate supervisors, office managers, and service writers and estimators. Farrington says another position that will need to be re-examined is the position of the lead technician. Often, Farrington says, this title is given to a technician that supervises the shop floor. The position will only qualify for exemption from overtime pay if the lead technician’s primary duty is management, not hands-on work.
According to the Department of Labor, each of the following three tests must be met to qualify for the Fair Labor Standards Act (FLSA)’s white collar exemption:
1. The employee must be paid a fixed salary.
2. The employee must be paid over $47,476 per year (an increase from $23,360).
3. The duties of the employee must be primarily administrative and professional.
This means that a manager at a mechanical repair shop might be exempt, but he or she would have to pass the duties test for an executive employee. According to the DOL, unless a worker falls within the scope of another FLSA exemption, most other workers in the auto industry are considered blue collar and qualify for overtime.
Farrington warns shops to be extra careful and look into both the federal and state regulations. Just because a shop has complied with the federal regulations does not mean they have met state requirements, Farrington explains.
“I had a conversation with a 1,000-person company that calculated that it would have to reclassify the pay of 10 percent of its workforce,” said Paul Fiore, director of government affairs for the Auto Care Association. “There aren’t a lot of options. Come Dec. 1, it will be very straightforward: If they don’t pass the duties test, shops will have to start paying overtime and watching or restricting hours.”
Edwards has already begun working on options for his clients. First, shops need to decide if it’s necessary for employees to be working more than 40 hours per week.
“One option is to pay straight hours and not allow them to work overtime. This will put the shop owner at a disadvantage,” Edwards says. “You have a customer that needs something, but nobody is there because they aren’t allowed to work overtime. You have to make sure staff is there.”
Another drawback to paying a flat salary is that employees don’t have a financial incentive to improve or be pushed to work harder. That’s why Edwards has created a model pay plan that involves a mixture of both salary and bonuses. He provided an example based on an hourly wage of $11.50:
Target: $40,000 per year
Salary (about 60 percent of total compensation): Employee can earn $23,920 at a rate of $11.50 per hour and can work 10 hours of overtime at $17.25 per hour, which totals $32,890.
Bonus (roughly 40 percent): A designated amount is put aside by a shop owner to award each year based on incentives, such as decreased cycle time or improved customer satisfaction scores, and the employee can earn the rest of their target through bonuses. The target of $40,000 a year takes into account the fact that employees will probably not hit all of their bonuses.
Preparing for December
Make sure all of your bases are covered by consulting with qualified counsel for legal advice, Farrington says. Fiore adds to that and suggests that shop owners have a conversation with an accountant or whoever is in charge of their financial planning. Shops that don’t have someone in charge of financials need to make sure they’re as prepared as possible and start working now to figure out what they’re going to do. If shops are not meeting the new regulations, employees can end up suing their employers for overtime pay. Farrington stresses the importance of keeping time records because without that documentation, shops are at the mercy of the least honest employee.