By Pamela L. Sande, CCP, Pamela Sande & Associates, LLC
The Fair Labor Standards Act (FLSA) guarantees most employees a minimum wage and premium overtime pay at 1.5 times their regular rate of pay for all hours worked over 40 in a single workweek. Although this guarantee applies to most employees, a business does not have to pay overtime to employees who perform jobs that qualify as “exempt” from the rules.
On May 23, 2016, the Department of Labor (DOL) published final FLSA rules that revise the exemptions for executive, administrative, professional, outside sales, and computer employees, collectively known as the “white collar” exemptions. To be exempt under one of the white collar exemptions, an employee must meet certain minimum requirements related to his or her primary job duties and in most instances, be paid on a salary basis that meets a specified minimum salary level. The changes to the white collar exemptions, which are effective December 1, 2016, may have a significant impact on your business, depending on the extent to which your business employs exempt employees at low salary levels. In summary, the changes are:
- Effective December 1, 2016, the current minimum salary level of $455/week ($23,660/year) will increase to $913/week ($47,476/year), representing an increase of more than 100 percent. The minimum salary level is set at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, currently the South.
- Effective December 1, 2016, the total annual compensation level for meeting the highly compensated employees (HCEs) exemption, which requires a very minimal duties test, will increase from $100,000 to $134,0004. The HCE salary level is set at the 90th percentile of full-time salaried workers nationally. The increase is higher than expected.
- The minimum salary level and the total annual compensation level for HCEs will be automatically adjusted every three years based on the above percentile settings starting January 1, 2020.
- Employers for the first time will be able to use nondiscretionary bonuses, incentive compensation, and commissions towards meeting up to 10 percent of the new minimum salary level, provided the bonuses, incentives, and commissions are paid on a quarterly or more frequent basis.
What did not change are the duties tests used for determining if an employee is exempt from overtime.
Given the changes to the FLSA overtime rules, what is the impact on your business? How will you prepare for the changes? What are the key things to consider in developing your strategy for implementing the changes?
As mentioned above, the businesses most impacted by the FLSA changes are those employing exempt employees paid at low salary levels – that is, below the threshold of $47,476. Businesses most impacted tend to be those in the healthcare, human services, and other nonprofit industries as well as some sectors of the retail and hospitality industries.
To begin determining the impact on your business, we recommend you collect at least the following information for your analysis:
- A report showing all salaried employees paid less than the new minimum salary level.
- A report showing all salaried employees paid more than the new minimum salary level but have a job title that is the same as an employee who is paid less than the new salary level.
- A report showing all salaried positions close to the new minimum salary level (e.g., salaried employees paid less than $55,000) to confirm the positions are appropriately classified as exempt based on the duties tests.
Once you have collected your information, recommend developing a “what if” financial model to determine the financial impact of various strategies for implementing the new FLSA rules. For example, a model could show the financial impact of increasing salaries to meet the new minimum salary level versus the cost of reclassifying the jobs as nonexempt and paying overtime. In addition, we recommend comparing what you would pay to any employee reclassified (regular pay plus overtime) to salaries of employees remaining in exempt positions. The purpose of the comparison is to determine whether there are any significant pay compression issues that will need to be addressed.
Strategies for addressing the new minimum salary level include:
- Increasing salaries to the new minimum salary level
- Instead of increasing salaries, reclassify the jobs as nonexempt and pay overtime
- If reclassifying the jobs as nonexempt, pay an hourly rate plus overtime or rather than pay an hourly rate, pay a salary plus overtime
- If increasing salaries to meet the new minimum salary level, consider using nondiscretionary bonuses, incentive compensation and/or commissions towards meeting up to 10 percent of the new minimum level
You will also want to factor in the following when deciding which strategies will work for your business:
- The impact on your time collection processes and payroll systems (For example, will new processes be required, additional software licenses or payroll processing fees, etc.?)
- The impact on staffing (For example, how will your business manage overtime to minimize cost? Will your business hire additional staff to minimize overtime or shift some work load to exempt employees, and if so, what is the impact of doing so on your business?)
Finally, once you determine your strategy for implementing the FLSA changes, it is critical to develop a strategy and plan for communicating with managers and their employees impacted by the changes. For example, if reclassifying employees to nonexempt, the employees must report their time the same as any other nonexempt employee. This may require training for managers and impacted employees. Another consideration is if an employee is reclassified to nonexempt and having to report his or her time the employee may feel as if he or she has been demoted. Thus, your communication plan will need to ensure there is a consistent message at all levels within the organization that this is “not a demotion.
COPYRIGHT, Pamela Sande & Associates, LLC
Pamela Sande, CCP is the Managing Principal of Pamela Sande & Associates, LLC, a Cape Cod, Massachusetts based consulting firm whose mission is to help clients drive business results through innovative, creative Total Rewards programs, including base compensation, incentive compensation, executive compensation, benefits, recognition, performance management, and talent development programs. Ms. Sande, with over 25 years of experience in Human Resources Management and Total Rewards, is known for her strategic and innovative approach to program design and implementation. She has spoken widely on compensation and benefits topics and is a co-author of two books published by Wolters Kluwer: Quick Reference to COBRA Compliance and Quick Reference to HIPAA Compliance. For more information about Pamela Sande & Associates, visit their website at www.psandeassociates.com or call 774-205-4018.