Overtime Pay and the Retail Revolution in Brooklyn: How the New “Final Rule” Will Impact The New Retail Sector

From DUMBO and Atlantic Avenue’s boutiques to Downtown Brooklyn’s new retail space, Brooklyn’s growing retail sector has turned a “bedroom community” retail market into a hotbed of growth, spurred on by fast moving growth in the real estate market which has defied nationwide trends and a continuing exodus of Manhattanites.  Even some parents of Brooklyn hipsters who themselves grew up in less-than-hip '60s Brooklyn are returning to retire in Brooklyn and spend time with their families.

As Brooklyn’s retail sector grows, it will continue to add retail employees, many of whom will be eligible for overtime pay.  Unfortunately, as wages increase in Brooklyn and elsewhere, given recent reform, fewer people are likely to qualify for overtime pay.  In recent months, the growing disparity has finally served as a catalyst for reform, and Brooklyn may be a front-runner for local regions that will be most significantly affected.

This past May, President Obama amended certain regulations for the Fair Labor Standards Act (FLSA).  With the primary intention of extending and reinforcing overtime protections for workers, President Obama’s “Final Rule” makes important changes to overtime exemption eligibility that will greatly increase the number of individuals who are entitled to earn overtime pay.

The exemption test has three components:

Salary Basis Test

To be exempt from overtime standards set by the FLSA, an employee must receive a predetermined and fixed salary that is not subject to reduction.

Change: The salary basis now encompasses up to 10% of non-discretionary bonuses and incentive payments (such as commissions) to satisfy salary level exemptions.  If this percentage does not satisfy an exempt status in a given quarter, the employer has until the beginning of the following quarter to make up for the shortfall.

Salary Level Test

Employees are paid above a certain salary per week to be exempt from the overtime rates of time-and-a-half, or 1.5 times the usual hourly rate of hours worked beyond 40 hours per week.

Change #1: The minimum salary level to be exempt from overtime has been increased from $455 to $913 per week, a value representative of the earnings of full-time workers at the 40th percentile in the South, which is currently the lowest-wage Census Region.  This is equivalent to an annual salary of $47,476.

The Fair Labor Standards Act also outlines a separate policy for “highly-compensated” workers, exempting them from overtime pay if they meet a distinct salary level threshold and perform at least one of the duties of an exempt employee.  The duties test mentioned below is less stringent for these workers, qualifying an employee as exempt if he or she often directs the work of at least two employees even if their executive duties are not fully met.

Change #2: The Final Rule raises the salary level threshold for highly compensated individuals from $100,000 to $134,004 annually (the national wage for the 90th percentile of full-time salaried workers).

Change #3: The Final Rule also incorporates a mandatory update to salary thresholds every three years (starting on January 1, 2010) to maintain the objective and accuracy of the overtime coverage as it adjusts to factors like inflation.  The standard and highly compensated thresholds will continue to reflect the full-time salary of their respective percentiles at the time of their examination.

Duties Test

Exempt employees hold positions that are characteristically “white collar,” or fulfill executive, administrative, and professional duties.  More information about the specific components of these tests is available on the Department of Labor website.

Importantly, no changes have been made to the components of the duties test.  However, there may be a change in its application.  The Department of Labor estimates that because the salary level test was raised so significantly, approximately 3.2 million blue-collar workers will no longer have to rely on a falsified duties test for entitlement to overtime pay.  This change will result in a reduced amount of misclassified exemption cases that the duties test created for many blue-collar and highly compensated workers.

So why might these modifications significantly impact compliance in Brooklyn?

According to findings of the Department of Labor, the Final Rule gives 4.1 million employees a new right to overtime pay—a tremendous expense for all employers to face. Private sector employment in Brooklyn increased by 20% between 2003 and 2013—a level unmatched by the rest of New York City—but lower-wage industries such as retail make up the largest proportion of this growth.

In the past decade, the number of wage and hour lawsuits has skyrocketed, and the potential for off-the-clock violations in the retail sector is monumental if business practices are left unexamined.  Listed below are four impacts of the new overtime laws for businesses in Brooklyn and the larger retail industry.

  1. Employers will have to keep a record of the total number of hours overtime-eligible employees work each day and week as well as their earnings and wages paid.

The Final Rule does not require overtime-eligible employees to be paid on an hourly basis if they are paid a salary, but these employees will have to report their daily hours in a similar fashion to ensure that their earnings and wages coincide.

  1. In the effort to be economical, employers will have to examine individual employees’ salaries and the regularity of which he or she works overtime.

Depending on these individual circumstances, employers could reduce labor costs by limiting hours, exempting the employee from overtime premiums by raising their salary, or simply pay the overtime rates of hours worked.  This could be a difficult (and often unpredictable) task for large management.

  1. Nearly a quarter of store locations in Brooklyn are national retailers where many employees are earning a salary but do not qualify for exemption.

Even with a high enough salary, the problem persists that many retail employees do not satisfy the exemption components of the duties test.  Employees with managerial job titles are not necessarily exempt if they do not perform all of the executive duties.

  1. With a minimum wage increase already taking effect, labor costs in the state of New York will be especially high.

Over 555,220 retail employees are paid the minimum wage in New York, and large chain employers offer most of the lowest wages.  Under the Minimum Wage Plan signed by Governor Cuomo, employees earning the minimum wage in New York City will earn $11 by the end of 2016 and an additional $2 each year afterwards before ultimately earning $15 by the end of 2018. Large retail employers in New York will have to grapple with this additional labor cost as they plan for the future.

  1. Small retail businesses may suffer the most from an increase in labor costs.

Of the roughly 49,840 businesses in Brooklyn, nearly 91% have fewer than twenty employees and 70% have fewer than five. Even before the Final Rule, these businesses have long struggled to compete with the proliferation of larger chains. A personalized experience and commitment to quality is often what makes small businesses attractive and differentiates them from larger competitors.  These services may be undermined, however, by necessary cuts employers make to staffing, hours, programs, and services.

Given the twofold degree by which the basic salary threshold increased and the scope of its consequences, one might expect a flurry of discussion and anxiety among employers about the impact of the Final Rule. Adam Ochstein, founder and chief executive of StratEx, observes that the opposite seems to be true so far. “Across the board, nobody seems to know about this,” Ochstein reported to The New York Times.

For the Fair Labor Standards Act to achieve the purpose of its design, it is critical that employers and employees alike are vigilant about the overtime laws and seek legal consultation early for any infringements.

Employers have until the effective date of December 1, 2016 to comply with the Final Rule, and how they will do so is not yet explicit. One thing, however, is certain: the price of complacency will be high as eligible workers become more informed about their entitlement to overtime pay.