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State panel says proposed overtime regs need more work

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A state panel tasked with reviewing regulations is questioning the cost, timing and need for the Wolf administration's proposed rules for expanding overtime eligibility.

The Wolf administration proposed new overtime rules earlier this year after federal efforts to revise them were shot down last year in court. The draft regulations were unveiled June 23 by the Pennsylvania Department of Labor and Industry.

If adopted, the new rules would expand the number of workers eligible for overtime pay in Pennsylvania, potentially driving up costs for businesses.

While some support the department’s proposal, others have sharply criticized it during a public comment period that ended Aug. 22. 

Based on the feedback, the department needs to do more work to justify the regulations, according to the state's Independent Regulatory Review Commission, which examines regulations before they can take effect.

"We believe the issues raised deserve careful contemplation because the department’s responses will affect approximately 460,000 salaried Pennsylvanians (by 2022), 230,000 businesses (of which 225,400 are small businesses) and 108,491 nonprofit organizations,” the commission said.

The issues revolve around the proposed eligibility thresholds, their schedule for taking effect and their potential to conflict with federal rules.

Under existing law, employees generally qualify for overtime if they make less than $23,660 per year.

If the state rules are adopted as they stand, the threshold would rise over three years from its current level to $31,720, then to $39,832 and then to $47,892.

The proposal also includes a provision to automatically update the salary threshold every three years after the final regulation’s publication.

The review commission noted that the double-digit jumps in the beginning would outpace the national average for salary increases of about 3 percent for the past five years.

"The difference between the national average for salary increases and the department’s proposed salary increase is significant, even with a three-year phase-in. Employers question the feasibility of absorbing such drastic increases," the commission said.

Many employers said the big jumps may force them to convert currently exempt salaried employees to hourly pay, reduce employee hours and/or benefits, restructure bonus programs or lay off employees.

The commission also noted concerns about the state finalizing its own rule in advance of potential federal changes, which may differ.

Several members of the state House and Senate have urged the department to withdraw its proposal and wait for the federal government to issue an overtime rule.

"The Department should explain why it is in the public interest to proceed with this rulemaking in advance of the federal changes," the review commission wrote, adding that if the agency moves forward, it should address how it will handle any mismatch with federal rules.

The review commission also asked the agency to further consider whether businesses would have enough time to comply with the proposed rule.

The rules may prompt employers to evaluate employee salaries, consider reclassifying some employees, draft new compensation plans and modify bonus and benefit plans, the review commission said.

"The department should explain how the implementation schedule provides sufficient time for compliance and is reasonable for employers to make necessary adjustments to their business practices. It should also describe the process the department will undertake to communicate with the regulated community about the new requirements and implementation schedule," the commission said.

Additionally, the commission said that based on the explanation of the regulation, it was unable to determine if the regulation is in the public interest.

Officials from L&I were not immediately available for comment.

The proposal

To be eligible for overtime under the state proposal, an employee must be paid both on a salary basis at or below the maximum level and perform certain job duties. 

In addition, the proposed changes include revisions to the "duties tests," which are used to determine whether certain employees are eligible for overtime pay.

In Pennsylvania, an estimated 465,000 workers would become eligible for overtime pay over the next three and a half years if the proposal is adopted, according to the Wolf administration.

A similar proposal submitted by President Obama in 2015 was ultimately struck down in federal court last year. The proposal would have made more than 4 million employees eligible for overtime.

If the state proposal is implemented as is, employers would either need to track hours and pay overtime to newly qualified workers or raise salaries above $47,892 in the next three years to keep those workers from being eligible for overtime.

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Shelby White

Shelby White covers banking and finance, law and Lancaster County for the Central Penn Business Journal. For tips, email her at swhite@cpbj.com.

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