Outside vs. inside sales: For DOL it’s a key distinction

If some of your employees are taking too much time to get the job done, now would be a good to have a serious sit-down talk with them and insist they start working more efficiently.

If you don’t, you could end up doling out a lot more in overtime pay.

The reason: a new U.S. Department of Labor rule that kicks in December 1. The regulation, which requires that employers meet a higher salary threshold to keep employees exempt from paying overtime, was the focus of a morning workshop at NAILBA 35, the 2016 annual meeting of the National Association of Life Brokerage Agencies, which took place in Dallas Nov. 17-19. The session’s presenter, Don Phin, explored the rule’s impact and how employers will need to adapt to withstand Labor Department scrutiny of their labor practices.

Nuts and bolts of the rule

Finalized last May, the new Labor Department rule raises by 100 percent (to $47,476 from $23,660) the threshold at which employees can qualify for so-called “white collar” exemptions from overtime pay. The rule also requires that the salary threshold be automatically adjusted every three years.

Revisions to the Labor Department’s existing overtime pay rule have been a long time coming. Last adjusted in 2004, the regulation is expected to affect 4 million-plus workers, including nearly 1 in 5 (19 percent) of staffers employed in insurance and financial services. Among them: customer service reps, office managers, paraplanners, marketing and inside sales professionals.

“Hours worked” under the rule’s definition, said Phin, includes all time spent performing job-related activities that genuinely benefit the employer; the employer “knows or has reason to believe” the employee is carrying out; and the employer doesn’t prohibit.

Also included under the definition: “off-the-clock” time workers spend maintaining equipment; staying at the office without logging in overtime hours; doing job-related work at home; and working through (among other activities) meals, waiting time and training time.

Given these parameters, said Phin, it’s critical that employers document staffers’ time on the job. The requirement applies regardless as to whether hourly workers put in a 40-hour work week.

“You must record all the hours worked by non-exempt employees, even if they never work overtime hours,” said Phin, an attorney and editor of the International Risk Management Institute’s Employment Practices Journal. “How you do so is up to you.”

Workship speaker Don Phin noted that employers will have a small window under the Labor Department rule — a “psychological hall pass” — to justify an employee’s reclassification. (Photo: Warren S. Hersch)

Deciding whether to reclassify

For salaried employees who previously were exempt, employers must decide whether to increase their pay to $47,476 to maintain the exemption under the rule; or, if employees also receive bonuses, to adjust their compensation by raising their salary by some amount while also reducing bonus pay.

For still other workers, such as customer service and support reps, an issue will arise as to whether they were previously misclassified as exempt. Those who should have been tagged as non-exempt may demand back pay for overtime hours, exposing the employer to litigation risk.

But Phin noted that employers will have a “small window” under the rule to justify the employee’s reclassification.

“Employers will get psychological ‘hall pass,’” he said. “They’ll have an excuse — the new rule — to properly classify people on staff. Many will be converted to nonexempt because the employer can’t support a salary increase to $47K.”

Business owners, he added, need not worry about reclassifying certain salaried employees. They include department heads, professionals such as lawyers and CPAs, “outside sales” people, IT professionals earning $913 per week or $27.63 per hour, and highly compensated employees who receive at least $134,000 between variable and nonvariable compensation.

The various caveats about salaried employees highlight a key point: Paying individuals on a salary basis doesn’t make them exempt; but to be exempt, they must be paid a salary.

As to variable compensation, the rule’s revised salary basis test lets employers use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percentof the new salary level. The employer must pay at least 90 percent (about $822) of standard salary weekly. Bonuses and incentive payments must also be distributed quarterly or more frequently.

Fuzzy job categories

“The DOL hasn’t revised exemption categories since the 1938 Fair Labor Standards Act, which established the 40-hour work week and time-and-a-half overtime rate,” said Phin. “The law doesn’t take account of the fact many ‘outside sales’ people now spend less time in front of clients and more time on social media, email, web conferences and the like.

The Labor Department, he added, is not concerned about how how much time outside sales people spend inside the office if they do have outside sales work. So long as they’re in the field meeting with clients and prospects, you needn’t “pay them a penny unless they make a penny.”

The same cannot necessarily be said of customer servicer reps, account managers and adjusters, whose jobs may straddle the line between sales and administrative work. To qualify as exempt, said Phin, they need to exercise “independent discretion and judgment.” Lest there be any confusion on this point, the employer should incorporate this language in their job descriptions.

Another potential sticking point for employers, he said, will be how much to adjust compensation for workers who, while currently earning a salary below the Labor Department threshold, also receive incentive-based compensation and nondiscretionary bonuses. To maintain employees’ exempt status, the employer could raise their salary to 47,476 while reducing variable pay.

If deciding against a salary increase, the employer could also opt for a combination of salary, overtime and/or variable pay that, based on hours worked, add up to a pre-determined amount the employer can live with. The business might additionally limit the employee’s hours to 40 per week and a hire a part-time, hourly worker to complete the job.

This last option, Phin suggested, aligns with an unstated motive of the DOL: to get employers to hire more workers and, thereby, counteract technolology gains that threaten to automate occupations across industries.

“The future of work in the insurance space — from selling to underwriting — will change dramatically because of advances in artificial intelligence,” said Phin. “The DOL realizes there will be less work to do, and so would rather have more people employed in this environment. I’ll bet anyone that, eventually, the overtime regulations will kick in at 35 hours per week.”

In the meantime, employers will also have to decide how to compensate people who work less efficiently than others on staff. The employer may have no problem paying time-and-half to a productive employee who needs to put 50 or 60 hours weekly to get the job done. That’s not necessarily the case for slow workers who are taking too much time.

To deal with the unproductive, Phin advised that employers require such workers to complete an overtime authorization form stipulating why they need to work extra hours. “The employer shouldn’t have to pay overtime to someone who can’t get their work done in 40 hours a week when someone else doing the exact same work can,” he said.