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 In 2014, President Obama began speaking publicly about the outdated overtime rules and how many employees were working many hours for which they were not being compensated.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
In President Obama’s State of the Union address in January 2014, he talked about four years of positive economic growth, increased corporate profits, and higher stock prices. He then went on to say that even with the increased prosperity, average wages had barely budged.
Later in the month, President Obama began discussing the overtime regulations and how “managers” are being taken advantage of by employers and work many hours for which they do not get paid. He used the example of a clothing store manager who works 55-60 hours per week and does not get paid for those extra hours (hours over 40). That was the beginning of the public review by the Department of Labor (DOL) of the minimum threshold and non-exempt versus exempt job classification. To clarify, non-exempt means the employee is NOT exempt from overtime laws and must be paid for all hours worked, including time and a half for all hours worked over 40 in a week (some States have more stringent overtime regulations). Exempt means the employee “qualifies” to be exempted from overtime laws and is paid a set wage, or salary, regardless of the number of hours worked in a week. The pay is the same whether they work 30 or 60 hours.
Currently, the minimum salary threshold to qualify for exemption from overtime is $455 per week, which is $23,660 per year. The proposed rule from the DOL is $970 per week, which is $50,440 per year. If the rule goes into effect in 2016, it means that any employee under that minimum threshold, regardless of job duties, would have to be classified as non-exempt and be eligible for overtime pay. These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine.
Employers don’t have to sit around and wait until the DOL’s proposed overtime rule is finalized. While the DOL reviews the 290,000+ comments on the proposed rule, employers can get ready for whatever happens.
There are a few simple steps employers can take to help with compliance efforts even before the final rule is released.
Employers should identify all exempt jobs within the company with salaries that fall below the proposed new salary threshold for exempt employees, using $970 per week, or $50,440 per year. Once that list is compiled employers have to determine whether to have a range to determine which employees close to the new threshold will get wage increases to maintain exempt status, or whether the best course of action will be to reclassify as non-exempt all employees whose current salary is below the new minimum.
If employees will be reclassified, employers then need to understand how many hours this group of employees is currently working per week. With this information it will be easier to forecast potential wage expense going forward. Employers should also take the opportunity to determine what approach to take in setting non-exempt pay rates for those former classified exempt employees. For instance, will it be best to determine the hourly rate by simply taking the current weekly salary and divide by 40 hours, or will it best to try and replicate current pay and hours by lowering the hourly rate to account for the possibility of overtime compensation.
Consider whether to reclassify other positions at this time to manage risk and enhance compliance. The questions employers should ask is “What operational changes must be made as a result of any reclassification of positions?” “What changes need to be made to job duties?” “What changes need to be made to schedules or staffing levels?”
Employers should evaluate those positions that often result in overtime and determine if hiring more full-time, part-time, or seasonal employees is best. Should the entire workforce be restructured to offset the possibility of more overtime?
Another important activity to prepare for the possible changes is to review all job descriptions. Are there activities currently being performed by exempt, soon to be non-exempt employees that can be reassigned to other exempt employees? Of course, in light of greater scrutiny that is sure to come from the DOL, employers should also review job descriptions of those who will meet the minimum threshold to ensure the job duties support exempt classification.
Employers should also evaluate the current record keeping process to ensure it will support a greater number of non-exempt employees in the workforce.
Another important action employers should take is to become familiar with the duties test for exempt versus non-exempt and ensure job descriptions reflect accurately the position requirements. Although the duties tests can be complicated, there are 3 basic job duties that generally qualify as exempt status:
- Does the employee regularly supervise two or more employees?
- Does the employee manage others as the primary job responsibility? A rule of thumb to keep in mind is these employees should not spend more than 40% of their work engaging in non-exempt job duties.
- Does the employee have genuine input into the job status of other employees? Merely supervising the work is not enough. The employee must have the responsibility for scheduling and controlling the work; and have hire, fire, and employee discipline authority.
Some articles I have read speculate whether the DOL will move forward to implement the new standards. Personally, I would rather expect the best, but prepare for the worst. Especially since others in the DOL and Obama administration supported increasing the minimum salary threshold anywhere from $60,000 to $70,000 per year. With that said, there still exists the possibility the DOL will back down some from its doubling of the salary threshold for exempt employees. Some experts feel the DOL may eventually settle on a threshold of between $773 per week or $40,196 per year and $852 per week or $44,304 per year. Employers should analyze which employees fall below these thresholds as well, to better prepare themselves for the possibility of a different salary threshold.
Lastly, employers should develop a communications strategy for whatever changes become final. Communication should include information on the changes in overtime exemptions and how it impacts the scheduling and managing of job duties. Will changes be communicated in writing? Should an employer have group or individual meetings?
It is almost guaranteed that employees already have an idea some change may be coming and could start developing anxiety about losing exempt status, benefits and pay, which to them means a demotion. It would be wise to be proactive and develop a FAQ for employees.
The bottom line is employers should not wait to see what happens. They should be preparing now, regardless of what the final minimum threshold salary level may be. Personally, I do not think it is a matter of if, but when. This is not the time to be frugal and put one’s head in the sand. Get the help you need and get done what needs to be done. Planning for this future is too important. Good luck!
To your success,
Richard Davis, SHRM-SCP, SPHR
McClain Group, LLC