Exempt No Longer – What do the changes to the overtime rules mean for your business?

exempt no longer

This Friday, September 4th, the comment period closes for the Department of Labor’s (DOL) proposed changes to overtime exemption rules of the Fair Labor Standards Act (FLSA). Expected to take effect in 2016, it has the potential to impact millions of employees across the nation who will now be eligible for overtime pay. For employers, this could mean much higher labor costs starting in 2016.

What is changing?

Currently, to qualify as exempt, an employee must (1) be paid on a salary basis meeting the minimum weekly salary threshold and (2) perform certain job duties often associated with administrative, management or executive roles. The changes being proposed by the DOL would adjust the minimum weekly salary threshold, thereby increasing the number of employees across the nation who are eligible for overtime pay.

As stated by the DOL, the proposed changes focus primarily on “updating the salary and compensation levels needed for white collar workers to be exempt.”

According to the The Notice of Proposed Rulemaking (NPRM) fact sheet, the DOL proposes to:

  1. Set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers ($921 per week, or $47,892 annually)
  2. 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)
  3. 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 current exempt minimum salary is $455 per week ($23,660 annually). As such, the DOL’s proposed minimum exempt salary will more than double the current minimum salary. Based on 2013 data, the new threshold would be $921 per week, or $47,892 annually; for 2016, the minimum salary level is estimated to be about $970 a week, or $50,440 a year.

The minimum salary has been updated periodically over the years since the FLSA was passed in 1938 with the most recent update taking place in 2004. However, it has been argued that these infrequent updates have not kept up with inflation and, thus, have failed to maintain the protections intended by the salary test. To prevent this in the future, the DOL’s proposed changes also include an automatic annual update of the salary and compensation levels going forward to maintain the minimum at the 40% level.

How does this impact you as an employer? How can you prepare?

The proposed changes are currently in the review and comment phase until September 4, 2015 and are expected to take effect in 2016. Therefore, businesses have some time to prepare. Some steps employers may want to take by the end of the year include:

  1. Review Your Current Employee Base

Depending on the types of employees you have, the impact will vary. As this change is likely to dramatically impact 2016 labor costs for many employers, a first step to prepare would be to conduct a review of your current labor costs, identify the number of employees who will be impacted and estimate the impact. Since there are no proposed changes to the job duties test at this time, you should be able to identify those who meet the job duties test but do not meet the minimum salary threshold (estimated to be $50,440 a year for 2016). As you budget for 2016, consider these increased labor costs, and evaluate the best course of action for your business. If you have a number of previously exempt employees who will now qualify for overtime, you may want to adjust budgets to plan for overtime pay for these individuals or consider if hiring additional staff is necessary to share the workload and thus reduce or eliminate incurred overtime for now-eligible employees.

  1. Review Job Descriptions and Salaries

With the threshold changing so dramatically, it would be wise to review all employees’ salaries and job descriptions in this new light. If in your review of your personnel, you identify currently exempt employees who are near the new threshold, for example, a salary raise to a level above the threshold may be more cost effective than keeping them at the current salary, plus overtime.

Additionally, it is always a good practice to review job descriptions annually to ensure your employee classifications are accurate. Though at this time the standard duties test is not changing, maintaining up-to-date job descriptions for your employees will ensure that when adjustments such as the proposed changes for 2016 are made, you have an accurate understanding of those who are impacted.

  1. Review Your Time Keeping Policies

If you have employees changing from exempt to non-exempt under this change, you will need a solution in place to track the hours worked for those newly non-exempt employees. If your staff currently consists mostly of exempt employees and you are not accustomed to tracking work hours, this could present a big change for you, so you may need a new or updated time keeping system and policies.

  1. Prepare for Implementation

Once you’ve evaluated your current staff and estimated the impact, you can develop a game plan for implementing the changes. For example, newly non-exempt employees will need training on timekeeping practices and systems. You may need to implement new policies for previously exempt workers, as well as training regarding procedural or system changes. For instance, previously exempt employees who regularly check email in the evenings and weekends, travel or attend events for work or take meetings or phone calls outside of business hours may now be eligible for overtime pay for activities such as these. Communicate clearly your expectations regarding tracking work done outside of business hours. Additionally, employees who have not had to track their hours for many years may go through a bit of culture shock with the transition to non-exempt, so thorough training and communication will be key to preventing confusion or disruption.

  1. Create a Communication Plan

Change can be difficult and confusing, especially when it has the potential to impact so many. Therefore, you may benefit from developing an overall communications plan for explaining these changes to the entire staff. You may need to be prepared to answer questions regarding why changes are impacting some but not all. For example, you may have workers with similar job titles and duties, but based on their salaries, one will now be eligible for overtime and the other will not. Conduct meetings with your leaders to prepare them to answer questions employees might have and establish the proper channels for answering questions.

Beyond the Initial Changes

Adding further complication to this is the annual adjustment portion of this rule change which will ensure that the minimum threshold is reviewed annually and adjusted as necessary, essentially making nearly all of the above steps necessary on an annual basis.

When it comes to employment law and creation/execution of policies, it is important to follow the letter of the law. Failing to adjust to the rule change or misclassifying your employees in general could cost you as the employer thousands in penalties, fines and payment of back wages. Taking the time to prepare for these changes now and ensuring you are properly classifying your employees will help you avoid costly mistakes. Of course, always consult an attorney or human resources professional regarding any changes impacting your workplace or employment policies.

© 2015 Dale Hageman

Note: The Notice of Proposed Rulemaking (NPRM) was published on July 6, 2015, in the Federal Register (80 FR 38515) and invited interested parties to submit written comments on the proposed rule at www.regulations.gov by September 4, 2015. Only comments received during the comment period identified in the Federal Register published version of the NPRM will be considered part of the rulemaking record. Source: http://www.dol.gov/whd/overtime/NPRM2015/



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