Unless you’ve been “unplugged” for the past few months, you’ve probably heard about the Department of Labor FLSA overtime rule changes. We bet you’ve even been inundated with seminar and webinar invitations to learn more about how this new rule will affect your business (some of those invites may have been from us!)
But just in case you haven’t had time to attend these webinars or you’ve been pretending like this isn’t going to happen or if you just need a refresher – we have the blog for you!
Here’s a look at what’s happened and most importantly, what employers need to do before December 1 to be compliant with the new FLSA overtime rule.
So, what is the new FLSA overtime rule?
This change has been in the works for quite a while. In January of 2014, President Obama indicated that dealing with “stagnant wages” was a top priority. Fast forward to July of 2015, there was a notice of proposed rulemaking. The comment period closed September 4, 2015. In March of 2016, the Final Rule was sent to the Office of Management and Budget, which brings us to May.
In May 2016, The Department of Labor announced a new salary threshold for certain employees to qualify as exempt from minimum wage and overtime – via the Fair Labor Standards Act’s White Collar Exemptions.
The Final FLSA Overtime Rule issued by the Department of Labor raises the salary threshold indicating eligibility for overtime from $455/week to $913/week ($47,476 per year). This rule only applies to executive, administrative, and professional exemptions – but that still adds up to around 4.2 million employees in the US!
This rule strengthens overtime protections for salaried workers already entitled to overtime and provides greater clarity for workers and employers. The effective date is December 1, 2016, which is actually pretty generous considering that the rule has been in discussion for a while, and the DOL only has to give organizations 60 days to make changes.
Out with the old, in with the new:
Old: The FLSA requires that covered employers pay minimum wage (federal: $7.25) and overtime (time and a half on more than 40 hours worked in a workweek) to employees, unless they are exempt from these requirements. The exemptions are few, and have vague descriptions. Most of them require, among other things, that an employee be paid a certain amount in salary. For executive, administrative, and professional workers to be exempt from overtime eligibility, they needed to be paid a salary of $23,660 annually (or $455/week).
New: It will now be $913 per week; $47,476 annually for a full-time employee. This applies to the exemption for executive, administrative & professional. The Outside Sales Professional exemption is not tied to salary, so it will not be impacted by this change. Doctors, lawyers and bona fide teachers are not subject to the minimum salary requirements, and computer professionals have their own pay requirements.
How was the new salary level determined?
The 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South.
Can we include bonuses towards calculating the $913/week salary level?
Yes, but only certain types. Up to 10% of this income may come in the form of non-discretionary bonuses, incentive pay, or commissions, as long as that portion of the compensation is paid at least quarterly.
Will this new salary level change again?
Salary threshold will increase every three years. It will also be set at the 40th percentile of weekly earnings among full-time salaried (not necessarily exempt) employees in the country’s lowest income region – currently the South. It is expected that the next change, which will be effective January 1, 2020, will increase the minimum salary to approximately $51,168.
There’s been scuttlebutt that the “duties test” for determining exemption status would change too, has that happened?
No. The DOL has stated that while no specific changes are proposed for the duties tests, they have expressed concerns with the current duties tests. In other words, NOT YET. The current definition of “primary duty” is still the “principal, main, major or most important duty that the employee performs.”
Tell me more, tell me more!
The new FLSA overtime rule also increases the minimum salary threshold for the Highly Compensated Employee (HCE) exemption from $100,000 per year to $134,004 per year. The HCE exemption has a streamlined duties test.
How does the final FLSA overtime rule compare to what was proposed?
Salary level was lowered from an anticipated $50,440 to $47,476. Compliance deadline is considerably longer than the anticipated 60 day from enactment deadline. No changes in duties test or definition of primary duty. Automatic adjustment every 3 years instead of annually.
I’m still in shock…Is there anything in the works to stop or delay this?
There are measures pending in the House and Senate. It’s also possible that Congress may attempt to delay the rule. Alarm/concern has come from the business community as well as non-profits and higher education. Of course, we can’t rely on this possibility, so we need to start making changes.
So… What now?
You have two options:
- Raise the salary of all employees paid under the new level to the minimum.
- Example: George is a Facilities Manager and currently is paid an annual salary of $45,000. You can raise his salary to at least $47,476.
Cons: Increased pay may cause budgetary concerns. You have to keep in mind that there will also be salary review every three years, and you may have to continue to increase compensation. Increasing salaries may also cause morale issues from managers already making above the threshold and not getting an increase in pay. Raising salaries causes compensation compression issues across the board.
- Change employee status to a non-exempt and convert salary to hourly.
- Example:Using George the Facilities Manager, divide his current salary by the hours worked in a year to determine hourly rate: $45,000/2080 (40 hours per week x 52 weeks) = $21.63
Cons: Budgetary concerns are still taken into account if the individual works a lot of overtime. Secondly, employees can no longer take a few hours off and still be paid unless they have paid leave options. You also still have to consider morale issues from employees who see exempt status as a perk. Finally, there’s the issue of converting white collar employees and their supervisors from a “salaried” to a “time-clock” mentality.
Where can I get more info about these new overtime rules?
The Department of Labor website has a wealth of information including fact sheets for Non-Profit, Higher Education and State and Local Government. Pretty much every organization must comply with these changes. Need some quick facts? Check out DOL’s fact sheet here.
Other legal complexities include:
- Off-site email and internet access for newly-made non-exempt employees
- Travel pay differentials
- Telecommuting and keeping track of time
- FLSA retaliation claims
- Be wary of the independent contractor “fix”
“Always Be Prepared,” said the boy scout.
Start your preparations now. Here’s a list of what you need to do:
- Create a timeline for decisions
- Communicate to employees what you’re planning to do
- Identify employees who need to be reclassified
- Develop new compensation plan for the reclassified employees
- Review & update wage-hour policies and processes, including “after hours work,” “electronic device usage,” “telecommuting,” “off-the-clock work,” travel and overtime policies.
- Update position descriptions and identify correct classification – exempt or non-exempt. If you don’t know, let us help you with that.
- Communicate the changes
- Train the reclassified employees and their managers
While we’re at it…
Now is a terrific time to review your wage and hour compliance issues, worker classification (employee, contractor, volunteer, intern), FLSA classification review for employees, and time-clock and time recording practices.
I can’t do this alone! Who can help?
Integrity HR’s consulting team has been helping clients not only prepare for these changes, but also take steps to ensure employees are currently classified properly. We can help you create a practical approach to get ready, analyze options, and help you implement these changes smoothly in your organization. Remember, violations of the FLSA carry pretty expensive penalties… so don’t be caught unprepared, unless your bank account looks something like Warren Buffet’s. Let us help you in this process. To talk to one of our consultants, click here.