New OT rules pose challenges for Delaware small businesses

Ryan Davis works about 50 hours a week as an assistant manager at a Grotto Pizza in Rehoboth Beach -- up to 70 hours during the summer.

But as a salaried employee, his paycheck is the same no matter how many hours he puts in.

But starting Dec. 1, Davis and more than 15,000 workers in Delaware could be eligible for overtime pay under new federal rules announced by the Obama administration.

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

The policy unveiled last week updates a long-standing exemption that allows employers to avoid paying overtime wages to executive, administrative or professional employees. The Obama Administration says 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.

"This is a step in the right direction to strengthen and secure the middle class by raising Americans' wages," the president said last week. "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, local trade groups and labor leaders 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 workforce.

"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.

"Imagine if property values were revised all at once rather than in steps and that's what this is like for us," said Paul Rada, chairman of the Delaware Hotel & Lodging Association.

"But there's not much we can do about it, frankly," he added. "So we've all got to figure out a way to deal with it."

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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 percent of full-time, salaried workers. The new rules would lift that ratio back to 35 percent, 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 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.

Christiana Care, the state's largest private employer with more than 11,000 workers, will only have about 20 employees impacted by the new rules, according to Chief Human Resources Officer Audrey Van Luven.

"The vast majority of employees within Christiana Care who potentially could be impacted by the legislation already receive overtime pay," she said.

Meanwhile, about 350 workers at the University of Delaware – roughly 8 percent of its entire workforce – will mostly likely see either a salary increases or more overtime pay as a result of the new rules, according to chief human resources officer Tom LaPenta.

"It's certainly not going to cost less money," he said. "We haven't had time to determine the total cost or how we're going to pay for it. I don't see it impacting tuition here, but at other colleges, especially smaller ones, that could occur."

But 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, according to human resources director Glenn Byrum.

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

"It definitely poses a problem for us," Byrum said. "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."

Davis said he hopes his employer does not choose to the latter option.

"I wouldn't want to go back to hourly," he said. "There's no way someone could do my job in 40 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, said the new regulations also come at a particularly difficult time for small companies already dealing with rising health care costs and last year's minimum wage that upped the state's minimum hourly pay to $8.25 – the second half-dollar bump in a year. A bill in the General Assembly seeks to further increase the minimum wage to $10.25 by 2020.

"It feels like small business is being nickle-and-dimed to death," he said.

Older, who owns Creative Travel in Milltown, also 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 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."

The Associated Press contributed to this report.

Contact business reporter Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.