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Pa.’s new overtime rules: Boost, or bane?

Pennsylvania has joined a handful of states that have raised their thresholds for overtime pay above federal levels, which is projected to extend overtime pay to 82,000 additional Pennsylvania workers within two years.

On January 31, the state’s Independent Regulatory Review Commission (IRRC) voted to approve final regulations by the Department of Labor & Industry (L&I) that will phase in salary increases over three years.  This year the threshold will be set at the federal level ($35,568 annually).  In 2021 the threshold will be increased to $40,650 (or $780 per week), and in 2022 the threshold will be $45,500 (or $875 per week).

DLI accomplished this by amending regulations in the Pennsylvania Code to update the salary threshold for Executive, Administrative and Professional workers who are exempt from receiving overtime pay, otherwise known as the “white collar exemptions.”  The state based these amendments on statutory law which permits L&I to revise the definitions of those provisions “from time to time” in order to “safeguard the minimum wage rates thus established.”

The last update of the regulations occurred in 1977.

Absent a legal challenge to the regulations, they will take effect upon publication of the rulemaking in the Pennsylvania Bulletin.  The new regulations, however, will have no practical effect on employers or employees this year.  That is because the new regulations merely bring the state threshold up to meet the federal threshold already in place.  As employers are already required to meet this threshold, nothing further need be done this year.

Approximately 61,000 Pennsylvania workers became eligible for overtime pay when the federal regulations increasing the prior threshold of $23,660 took effect this year.  About 34,000 more Pennsylvania workers will be subject to overtime pay in 2021 and another 48,000 in 2022 under the new regulations, according to the Economic Policy Institute (EPI).  These workers could see average estimated increased earnings between $20,257,417 to $22,639,208 per year after final implementation of the salary threshold increase, according to L&I.  EPI estimates that 63% of those affected are women and 15.8% are minorities.

Other provisions of the new regulations allow up to 10 percent of the salary threshold to be satisfied by nondiscretionary bonuses, incentives and commissions, paid quarterly or more frequently.  In addition, the minimum threshold will automatically adjust every three years starting in 2023 and every third year thereafter.

Even if an employee meets the salary threshold for exempt status, however, that is not the end of the inquiry.  The employee must also meet the duties test for each category in order for the employee to be classified as exempt.  The new rules changed the state duties tests to mirror those of federal law.  The trickiest category here is with the administrative exemption, where the employee’s “primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.”  That means that an employee cannot be categorized as exempt if the employee does not exercise discretion and independent judgment as to how the job is performed, even if the salary threshold is met.

Employers have a number of options for dealing with the new rules, in addition to just paying time and a half to employees who become subject to overtime.  They can limit non-exempt employee work to 40 hours a week to avoid overtime costs.  They can keep overall costs relatively the same by reducing the base pay to make up for the extra pay if an employee regularly works overtime, as long as the base hourly rate does not go below the minimum pay rate of $7.25 per hour.  They could also raise non-exempt employee salaries to above the threshold in order to keep them exempt.

Last year, as part of a compromise with Republican legislative leaders, Governor Tom Wolf agreed to back off from his push to raise the overtime threshold in exchange for an incremental minimum wage hike up to $9.50 an hour in 2022.  The Senate passed the bill, but it never came to a vote in the House.

Naturally, there were advocates both for and against this change in the overtime rules.

“Many small business owners submitted comments explaining this excessive expansion of overtime will cause them financial turmoil, leading to fewer hours for employees, and a limit on future promotions for those who have just moved from hourly to salaried positions,” Rebecca Oyler, of the Pennsylvania branch of the National Federation of Independent Businesses, said in a statement.

Gene Barr, president and CEO of the Pennsylvania Chamber of Business and Industry, said in a statement that he was “disappointed” by the IRRC’s vote.  The Chamber had contended that the new rules would inflict higher costs on employers and possibly force those with thin margins to layoff employees or slash wages and benefits.

L&I cited in its regulatory analysis other comments reflecting positive outcomes from the rules change, however.  Most simply, many workers could see their pay remain the same, but their hours capped at 40 per week, ending uncompensated time spent at work.  L&I received comments citing examples of low-level supervisors in the retail, hospitality and food service industries working 60-80 hours per week without any overtime pay, while making less than a living wage in a low-salary occupation on a per hour basis.  (A living wage is considered $11.45 an hour for a single adult residing in Pennsylvania.)

More free time for workers can mean time to pursue educational goals or a second job to supplement income or gain work experience to enhance earning potential.  Furthermore, DLI states that income gains by lower wage workers could lead to a decrease in the use of public assistance.

Benjamin C. Dunlap, Jr. is managing partner at Nauman Smith, a Harrisburg-based law firm, and concentrates his practice on business and employment law.

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