After much anticipation, the U.S. Department of Labor unveiled sweeping changes to the Fair Labor Standards Act (FLSA) overtime rules this week.
These regulations — which haven’t been updated in over a decade — are estimated to make nearly 4.2 million current workers eligible for overtime pay. The new rules double the minimum salary required to be earned to be considered exempt from overtime requirements to $913 per week or $47,476 annually for salaried employees. They also increase the salary threshold of highly compensated employees from $100,000 per year to $134,004 per year.
In a surprising twist, employers will also be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level. If employers decide to use that extra income, payments will need to be made on at least a quarterly basis. If the employer finds that the employee doesn’t earn enough in nondiscretionary bonuses or incentive payments in a given quarter to retain exempt status, then they can make a catch-up payment to the employee at the end of the quarter to ensure the salary continues to meet the minimum threshold. When there is no guarantee of payment, the employer will be required to employ additional tracking methods or risk a loss of exemption for the quarter.
Although companies have until December 1, 2016, for the rules to take effect, many are still unprepared. According to recent ADP research, only 25% of small business owners and 50% of midsized employers are aware of and taking actions to comply with the new overtime regulations .¹
Noncompliance can be costly, especially when you consider the average (for the 2007 to 2015 time period) wage and hour settlement payments cost companies about $6.9 million, according to NERA Economic Consulting.
In order to comply, employers need to evaluate their employees’ current classifications and confirm compliance. They should then evaluate whether they will either raise salaries to maintain an exempt status, or maintain the level of pay and begin paying overtime when the employee works more than 40 hours in a single week.
The immediate steps employers should take:
1. Evaluate classifications.
2. Investigate current hours worked.
3. Run financial impact analysis.
4. Consider the human relations impact.
5. Modify policies and procedures to manage the work hours of non-exempt employees.
6. Communicate the changes to employees and managers.
Before the rules were announced, there was speculation that employers would have only 60 days to comply with the new regulations. In reality, they now have more than six months, and that’s time employers should use wisely. Now’s the time to look at your company’s employee base holistically to make sure employees are classified properly, and to consider what these changes mean to the business financially.
It’s also vital that companies send the right message to employees, especially since some may not want to see their pay go from salary to hourly. It’s important for employers to communicate to employees that it doesn’t matter how their work is classified since their work is still extremely valuable to the success of the business.
Businesses also need to consider that if they reclassify a group of employees as non- exempt, they will have to pay more attention to their employees’ work hours (on company premises and off) and monitor schedules and hours worked on a regular basis.
Finally, there is the potential that employers may look to decrease some benefits such as training, medical or dental offerings to offset costs of increasing salaries or overtime pay. They will also have to consider how benefits eligibility may change when an employee is reclassified from exempt to non-exempt (if employee classification is an eligibility factor). It’s still too soon to determine the impact of these potential changes, as many employers have yet to determine impacted groups of employees and appropriate actions to take.
As with any changes in the regulatory environment, the first step for employers to remain compliant is to analyze the current workforce. It’s now more important than ever to examine your time and labor management systems and evaluate whether you have the tools needed to simplify compliance and control costs. The time to act is now.