Employers that have been preparing for months to comply with a major change to overtime regulations — raising salaries, implementing time-tracking tools, restructuring promotion ladders — find themselves in an awkward limbo after a federal judge on Tuesday blocked the change a week before it was to take effect.
"I feel like a student who studied every day only to see the test canceled at the last minute," said Michael Santoro, president of Walker Sands, a Chicago-based public relations and digital marketing firm.
The rule is delayed while a Texas federal judge considers whether to overturn a signature initiative of the Obama administration meant to put more money in middle-class pockets and prevent employers from overworking employees for free.
Under the Labor Department's new overtime rule, finalized in May and scheduled to take effect Dec. 1, employers wouldn't be able to exempt workers who earn less than about $47,500 a year from overtime pay, a big change from the $23,660 threshold that has been in effect since 2004. That would make an estimated 4.2 million salaried U.S. employees newly eligible to get time-and-half for hours worked beyond 40 a week. The threshold would readjust every three years to reflect changes in average wages.
On Tuesday, a judge in the U.S. District Court for the Eastern District of Texas granted a nationwide preliminary injunction to block the rule's implementation until he decides whether the rule is unlawful. The injunction is a victory for the 21 states that sued the Labor Department arguing the rule is unconstitutional and, because it also applies to government workers, could deplete state budgets. No timeline was given for the judge's final decision.
The Labor Department under President-elect Donald Trump could rescind the overtime rule — no congressional approval is required — but that wouldn't happen immediately because the agency would have to go through a rule-making process and public comment period that could take a long time.
All of this might not matter to frustrated employers that already have made changes, as taking back an employee's raise is no good for morale.
"It's kind of hard to unring a bell," said Antonio Caldarone, a partner at Laner Muchin who represents management in wage and hour litigation. "I don't see (employers) rolling it back or even delaying it."
Walker Sands had started operating as though the new rule was in effect on Sept. 1, to ensure it was prepared, Santoro said. About a third of his 80 employees are affected by the new rule, most of them entry-level salaried public relations professionals who start at $38,000.
"When (the rule) was announced, it was a huge deal, it was like the apocalypse happened," Santoro said.
As the company reviewed its employees' hours it realized the impact wouldn't be as severe as feared, because they weren't working too much overtime on a regular basis.
Still, he took pains to comply, upgrading the time-tracking system so that managers got daily input on how many hours employees were working, instead of weekly as it had before. It allowed them to more easily offset long Mondays with short Fridays to keep people to 40 hours a week.
Santoro, who didn't adjust anyone's salary and planned to pay overtime when the work warranted it, said the changes forced everyone to be more cognizant of time. The company is holding slightly fewer meetings as a result, and the meetings that do happen seem more productive, Santoro said.
Still, the uncertainty of the overtime rule's fate bothers him.
"The majority of good businesses are ready for the change," Santoro said. "We should reward those who properly prepared."
One Off Hospitality, which owns popular Chicago restaurants including Big Star, Blackbird and Publican, plans to move forward with changes it scheduled to go into effect Monday.
"We could not think for a moment to go back on our word," said Kimberly Galban, managing partner and vice president of operations. "We firmly believe if it will help take better care of our team, we are all-in."
One Off started evaluating its affected positions a year ago to determine who should be paid more in order to maintain exempt status and whose responsibilities could be trimmed to 40 hours a week. The group, which has 900 employees, counts about 66 salaried managers who earn below the new salary threshold, Galban said.
One Off plans to raise the wages of some hourly workers, likely restaurant hosts, who have space in their schedules to take on some supervisory duties, creating a new supervisory tier, Galban said. That gives them a chance to grow toward management while relieving the pressure on the assistant managers who would be moved from salaried to hourly positions and kept to 40 hours a week. The intention was to not shift those responsibilities to exempt employees and overburden them.
The cost will be significant, Galban said, and the company intends to offset it by cutting costs elsewhere, as it did when it added nearly half of its 900 employees to its health care plan. To offset those health care costs, One Off evaluated its vendors to ensure it was getting the best price on linens, paper goods and other equipment. It also decided to open some locations, such as Blackbird in the West Loop, on Sundays to boost revenue.
Though she anticipates a hit to the bottom line — there are no plans to raise menu prices — Galban considers the new overtime standards "a compliment" to the restaurant industry as it becomes a more stable career choice for people wishing to save money and raise families.
Still, she worries how it could affect smaller businesses that are facing mounting operating costs with less wiggle room in their budgets.
"I hope it doesn't de-benefit the smaller mom-and-pop restaurants that, really, we once all were at some point," she said. "Because that would be incredibly sad to this industry."
Not all employers can afford to boost wages.
Midge Seltzer, president of Engage PEO, which provides human resources solutions to small and midsized businesses, said many of her clients planned to "back into" employees' current salaries, making tweaks to their base pay so their paychecks will be the same even if they earn overtime for long hours. Some employers were guaranteeing those employees a certain number of hours of work to ensure they don't end up earning less on slower weeks, Seltzer said.
Morale was the biggest concern employers were facing as they told workers who haven't clocked in and out in years that they will have to track their hours, Seltzer said.
But at companies that could afford raises, some workers under the new rule would be in for a treat.
At Boka Restaurant Group, which owns the Girl and the Goat, Swift & Sons and a dozen other Chicago restaurants, co-owner Kevin Boehm planned to make the new $47,500 threshold the minimum salary for most managers. That would result in significant raises for some workers in order to maintain their status as exempt from overtime.
Boka held off on implementing some of the major changes as it waited to see if the rule would be delayed, and it plans more modest raises while it's in a holding pattern. The company employs 1,400 people, among them many managers and midlevel chefs who work long hours at pay below the new overtime threshold.
As a rough estimate, the change could cost the company $200,000 a year, Boehm said, which he hoped to absorb with other cost efficiencies but not menu price hikes.
Despite the hit to the bottom line, Boehm praised the overtime measure for helping close the gap between the earnings of workers in the front and back of house.
"It's a positive thing for the culture of cooking," Boehm said.
But he also had concerns about the long-term impact. While the pay bumps could give an initial morale boost, they also could weaken the meritocracy that gives workers incentive to climb up the ranks, Boehm said.
Specifically, the climb from junior sous chef, to sous chef, to executive sous chef, to chef de cuisine, will come with markedly smaller pay increases since the starting salary will already be so high, he said. The company planned to compensate by adding other perks, such as dining incentives and gym memberships.
With the rule delayed, Boehm said he still plans to raise salaries a bit but will keep a wider gap between tiers to maintain the financial incentive.
Nonprofits, whose mission-driven employees often work long hours on modest salaries, have been navigating not only potential cost increases but cultural change.
At New Moms, a Chicago nonprofit that serves young mothers at risk of homelessness, CEO Laura Zumdahl supports the spirit of the new overtime guidelines and the potential for protecting employees from burnout. But she worries the scrutiny on employees' time could have a demotivating effect if people feel they can't give their all.
The organization has been having "to push and push" employees to diligently use a new online platform it implemented for tracking hours that includes a smartphone app so they can report time worked on the go, Zumdahl said.
"Even if they check email for a few minutes at home, they have to track that," she said. "The feedback is just annoyance and the feeling that I just want to do the job."
The changes also squeeze its tight budget, raising concerns it may might have to curtail services. New Moms' $3 million budget is half private money and half public, including three state contracts that have suffered uncertainty and delayed payments due to the state's budget crisis.
New Moms, which has 47 employees, not only increased the salaries of some employees to exceed the new threshold and keep them exempt, but during a rigorous internal review with its legal counsel it found that some higher-paid doulas, who help women give birth, had been improperly classified as exempt and should be subject to overtime pay because they don't pass the "duties test."
In addition to the salary threshold, exemptions from overtime require that a position entail certain managerial or professional duties.
Given the unpredictable timing of births and other crises, New Moms is trying to be strategic about how it schedules doulas and be prepared to pay them overtime if needed.
"Does it change the number of people we can serve, or how well we can serve them, if the staff can't stay that extra hour?" Zumdahl said.
Despite the rule's delay, New Moms won't feel relief. The organization implemented the new procedures and salary increases earlier this year so that it wouldn't be scrambling at the last minute.
"No turning back now!" Zumdahl said.
aelejalderuiz@chicagotribune.com
Twitter @alexiaer