Wage and Hour Changes
Over the past few weeks I have had many clients asking what the changes to the overtime regulations mean to their business. For some companies the changes will have a huge impact and for others not so much.
Let’s first look at what started this whole process. In 2014, President Obama began speaking publicly about the outdated overtime rules and how many employees were working many hours for which they were not being compensated. I recall one such speech in which he mentioned those managing clothing stores who were considered exempt employees, working 50+ hours a week, and not being compensated for those hours. Early in 2014, the president directed the Department of Labor (DOL) to update and modernize the regulations governing the exemption of executive, administrative, and professional (EAP) employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act (FLSA). The DOL published a notice of the proposed rule making on July 6, 2015 and received over 270,000 comments for individuals, organizations, and corporations. On May 18, 2016 the Final Rule was published updating the regulations.
Before describing the changes to the regulation, I want to clarify two terms. An employee is either exempt or non-exempt. An exempt employee is one who is exempt from the overtime provisions of the wage and hour regulations. A non-exempt employee is one who falls under the provisions of the regulations and must be paid overtime for any hours worked in excess of 40 hours in a week. Some states have stricter overtime regulations, but I won’t go into that.
Currently, the minimum compensation for an employee to qualify for exempt status is $455 per week or $23,660 annually. The new minimum compensation, which takes effect December 1, 2016, is $913 per week or $47,476 annually. The Final Rule sets the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census Region, currently the South.
Highly Compensated Employees
Another change in the Final Rule is the exemption related to highly compensated employees (HCE). Under the current regulations, an employee who is compensated a minimum of $100,000 annually is exempted from overtime provisions regardless of job classifications. Under the Final Rule, the compensation requirement increases to $134,004 annually.
As mentioned above, the standard level was established using the 40th percentile. The Final Rule includes a mechanism to automatically update the minimum standard salary level requirement every three years beginning January 1, 2020 using the percentile test.
Nondiscretionary Bonuses and Incentive Payments
For the first time, employers will be able to include nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level.
The Final Rule requires that HCEs must receive at least the full standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses or incentive payments. Again, the minimum compensation for HCEs is $134,004 annually.
The Final Rule is not changing or modifying the existing job duties requirements to qualify for exempt status. From the DOL’s perspective, as a result of the change to the salary level, the number of workers for whom employers must apply the job duties test to determine exempt status is reduced, thus simplifying the exemption. Both the standard duties test and the HCE duties test remain unchanged.
What Should You Do?
1. Review all your current job classifications to determine the number of employees who meet the job duties test for exempt status, but fall under the new minimum compensation guidelines.
2. Decide whether it makes sense to increase the compensation of these employees to the minimum compensation or develop a process to manage overtime.
3. Review and revise your policies on cell phone use and email use during non-working hours. Any time a non-exempt employee is making business calls or checking and responding to emails outside of the normal work schedule, is considered compensable time. Many managers and supervisors stay connected to the company after work. The Final Rule could have an impact on anyone in this group who will be considered non-exempt once the Rule goes into effect in December.
4. Develop an effective communication strategy to all those employees who will be impacted once the Final Rule takes effect. Be proactive and not reactive to issues that might arise once the change is implemented.
Although the Final Rule does not go into effect until December of this year, don’t wait. Take action now and be prepared. If you need assistance in developing an effective strategy, don’t hesitate to reach out to a subject matter expert who can walk you through the process. As always, I am happy to help. Good luck!
To your success,
Richard Davis, SPHR, SHRM-SCP