What Employers Need to Know About the Department of Labor's New 2016 Overtime Rules
The Department of Labor’s (DOL) final rules on overtime exemptions are due out any day now. Employers will need to know precisely how white collar overtime exemption requirements under the Fair Labor Standards Act (FLSA) will change and the timeline for implementation of the final rules. They also must prepare to communicate the practical impact to the workforce.
Since 1940, the Department’s regulations have generally required each of three tests to be met for one of the FLSA’s white collar exemptions to apply:
the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed;
the amount of salary paid must meet a minimum specified amount; and
the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.
Certain highly compensated employees are exempt from the overtime pay requirement if they are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) and if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.
Back in March, the DOL submitted its final rule to update the regulations governing which executive, administrative, and professional employees (white collar workers) are entitled to the Fair Labor Standards Act’s minimum wage and overtime pay protections to the White House’s Office of Management and Budget (OMB). OMB review, which typically takes at least a month, is the last step before publication of final rule changes.
The Department last updated these regulations in 2004, and the current salary threshold for exemption is $455 per week ($23,660 per year). With this proposed rule, the Department seeks to update the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of nonexempt employees, thus making the executive, administrative and professional employee exemption easier for employers and workers to understand and apply.
The Notice of Proposed Rule making (NPRM) focuses primarily on updating the salary and compensation levels needed for white collar workers to be exempt. According to the Department, the Key Provisions of the Proposed Rule are:
set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers ($921 per week, or $47,892 annually);
increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually); and
establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.
The Department’s proposal to set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers represents the most appropriate line of demarcation between exempt and nonexempt employees. This salary level minimizes the risk that employees legally entitled to overtime will be subject to misclassification based solely on the salaries they receive, without excluding from exemption an unacceptably high number of employees who meet the duties test. As proposed, this would raise the salary threshold from $455 a week (the equivalent of $23,660 a year) to about $970 a week ($50,440 a year) in 2016. Note, however, Bloomberg BNA recently reported that the salary threshold in the final rule is actually lower – $47,000, – which would be almost double the current threshold.
The Department is also proposing to automatically update the standard salary and HCE total annual compensation requirements to ensure that they remain meaningful tests for distinguishing between bona fide executive, administrative, and professional workers who are not entitled to overtime and overtime-protected white collar workers. Experience has shown that the salary level test is an effective measure of exempt status only if it is up to date.
What do employers need to know about the proposed changes and how does it impact their organization?
Drastically increasing the FLSA’s salary threshold. As you know, the current minimum salary a worker has to be paid to be exempt from overtime is $455 per week or $23,660 per year. Well, under the proposed rule, it would jump to $970 a week or $50,440 per year. The DOL calculated that $50,440 would equal the 40% percentile of weekly earnings for full-time salaried workers.
The highly compensated employee threshold will also climb. The total annual compensation requirement needed to exempt highly compensated employees would climb to $122,148 from 100,000 — or the 90th percentile of salaried workers’ weekly earnings.
The salary thresholds will automatically increase. For the first time ever, the salary thresholds would be tied to an automatic-escalator. The DOL is proposed using one of two different methodologies to do this — either keeping the levels chained to the 40th and 90th percentiles of earnings, or adjusting the amounts based on changes in inflation by tying them to the Consumer Price Index.
No changes to the duties tests have been proposed. The DOL didn’t suggest changing the executive, administrative, professional, computer or outside sales duties tests as of yet. However, the agency sought comments on whether they should be changed and whether they’re working to screen out employees who are not bona fide white-collar exempt employees. Early indicators were that the DOL would look to adopt a California-style rule in which employees would be required to spend more than 50% of their time performing exempt duties to be classified as exempt.
Discretionary bonuses wouldn’t count toward salary threshold. In the proposed rule, discretionary weren’t part of a person’s salary calculation — but that could change depending on the comments the agency received. Currently, such bonuses are only included in calculating total compensation under the highly compensated employee test. But the DOL said some stakeholders are asking for broader inclusion of bonuses in salary calculations.
The overtime rule as proposed would make nearly 5 million exempt workers eligible for overtime pay unless their salary is raised, according to Labor Department estimates. Businesses in California, Florida, Illinois, New York, Pennsylvania and Texas may feel the greatest impact since those states are estimated to have the largest number of newly eligible workers – 200,000 or greater in each state.
While there’s always a chance the OMB may ask the DOL for adjustments to the final rule, employers can’t afford to gamble on that possibility. It’s important to prepare now for the pending changes to avoid substantial penalties down the road for non-compliance. According to NERA Economic Consulting, the average wage and hour settlement payment costs companies about $6.9 million.
Many employees may view being re-classified from exempt to nonexempt as a demotion or loss of status. While some employees will welcome the chance to receive overtime pay, others may see the need to “punch a time clock” as a demotion. Also, supervisors and managers of previously exempt workers need to be prepared to “manage” those of nonexempt status.
It’s our job as an HR professional and consultants to provide thoughtful, reasoned, and accurate responses to your employees’ concerns. Furthermore, employers must prepare to train supervisors and managers on their role in communicating and enforcing policy changes resulting from the final rules.
It is wise for employers and HR professionals to seek help from HR Consultants specializing in wage and hourly issues earlier to ensure compliance and decrease disruption in the work area.
The Barbelo Group-HR is helping employers and HR professionals prepare their organizations for the changes. Employers who hire Group-HR can rest assured that they are able to address possible issues and learn:
->How to explain succinctly and clearly the reasons why reclassification from exempt to nonexempt status is necessary
->How to ensure that supervisors and managers have the information they need to effectively communicate the practical impact of the final rules to their direct reports
->Key information to convey to employees—and how to make sure they understand what will now be required in terms of tracking hours
->How to head off concerns that going from exempt to nonexempt status is a demotion
->How to create a comprehensive communication plan that addresses employees’ concerns—and the timeline for rolling out your message
->Who to designate as the point person to field questions or concerns about reclassified exemption status
->Strategies for helping managers spot unauthorized work time—and tips for fostering a culture where nonexempt employees’ off time doesn’t turn into “work time”
->How to address the inevitable question of “Was I misclassified in the first place, and am I owed additional compensation?”
In addition, Group-HR helps employers and HR departments prepare for the pending FLSA changes by:
1. Assessing current environment, business impact, available resources and desirable options
It is critical for employers to immediately do an environmental scan to determine how the changes will impact their organization and identify viable options that will yield the most desirable outcome for both the employees and the business. Options should align with the organization’s culture – values, mission and vision as well as talent acquisition and retention.
2. Checking your state versus federal requirements
Each state may enact wage and hour statutes or regulations that differ from federal regulations. Employers will be subject to whichever set of requirements is more generous to employees.
3. Classifying employees by salary
Any employees making over the new threshold amount ($50,440 or the amount designated in the final rule changes) may be exempt from overtime if they are paid on a salary basis and their job duties primarily involve executive, administrative or professional duties, as defined under the regulations. HR and payroll professionals should make a list of the employees whose salaries do not exceed the new threshold because they may be entitled to receive overtime pay once the changes are enacted. Knowing the extent of the potential impact to labor costs can help business leaders more effectively budget for future expenses.
4. Calculating employee hours
It is vital that companies identify exactly how many hours per week each employee works so they can take appropriate action to ensure compliance. For example, if a previously exempt employee made $26,000 annually under the old rules, and actually worked 40 hours per week, then a company could convert that salary into an hourly rate equal to their pay, or $12.50 per hour. HR leaders and first line managers would then need to monitor those employees’ work hours proactively with threshold reports and/or scheduling tools to help manage overtime costs and to ensure that any work exceeding 40 hours per week is paid at the appropriate overtime rate.
5. Evaluating changes to salaries
Consider a different strategy for employees who make less than the proposed salary threshold, who were previously exempt from overtime and who typically work more than 40 hours per week. For these particular employees, employers could raise their base salaries to at least the exemption threshold. To determine if this is a more cost-effective approach, calculate the increased salary and compare it to the estimated overtime costs that would otherwise apply.
Group – HR helps employers examine these averages across their company’s entire workforce to determine if increasing some salaries is the best course of action. For example, if the average employee works eight hours of overtime per week at an hourly overtime rate of about $24 per hour, the average overtime paid would be around $10,000 per year. So, businesses could consider whether or not to increase the base salary of any employees with a salary of at least $40,000 per year who works the average or more hours. Employers may want to extend this analysis to anyone with a lower base salary but higher than average historical overtime.
In working with the executive team on the company’s business plan, we look at the ebbs and flows of the business and think about seasonal fluctuations. For example, are there any peaks and lulls? After this evaluation, a business might determine that a more cost-effective strategy is to hire additional full-time, part-time or even temporary employees. It’s important to keep in mind long-term goals and consider the possible impact that any planned implementation of automation or technology might have on managing labor costs.
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