New FLSA & Overtime Rules - Are You Prepared?
By now, you have likely heard about the Department of Labor’s (DOL) new Final Rule on the annual salary minimum for exemption from overtime. January 1, 2020, effective date is coming up fast, and right now is the time to assess the impact of the new salary limits. Time to be prepared by making decisions about what changes to make to ensure compliance; implement new policies, procedures, and systems to support the latest amendments; communicate the changes to those who will is impacted; and train leaders how to manage the changes.
What is the new Fair Labor Standard Act (FLSA) rule?
This revision to the FLSA is estimated to extend overtime protections to more than one million workers who are not currently eligible and would require them to be reclassified as nonexempt. The new exemption rule raises the annual salary threshold from $23,660 to $35,568 for professional, executive, and administrative employees. For highly compensated employees, the annual salary threshold will increase from $100,000 to $107,432. The DOL intends to propose updates to the salary threshold regularly to ensure that these levels continue to provide useful tests for exemption, although updates would not be automatic.
What do employers need to do to prepare?
Determine Whom Will Be Impacted
Employers should review and understand their current employees’ compensation structure and classifications as they relate to the FLSA exempt vs. nonexempt status.
Employees who are currently being paid on an hourly basis and paid overtime for hours worked will not be impacted by this updated regulation.
Identify all current salaried, exempt employees who make less than $35,568 per year ($684 per week). Employers are permitted to use incentive compensation to meet the salary level requirement partially. The $35,568 minimum can include no more than 10% from nondiscretionary bonuses, incentive payments, and commissions. This 10% catch-up may be paid on an annual basis or more frequently, and a single catch-up payment may be made to satisfy the salary level test within one pay period of the applicable 52-week period. See DOL Nondiscretionary Bonuses and Incentive Payments Fact Sheet.
If you have employees, who are not paid the same salary amount throughout the year, identify any who make less than $684 per week.
Review the job duties of all employees currently classified as exempt, regardless of income, to ensure they meet the “duties tests” of exemption eligibility. While the duties tests for exemption eligibility did not change, now is an excellent time to reclassify exempt employees whose duties have changed or who have been misclassified. Employees who are defined as exempt must meet one or more of the following DOL job test exemption tests on the following fact sheets: Executive, Administrative, Professional, Computer-Related Positions, or Outside Sales (for additional position exemptions see DOL Fact Sheets).
Identify any highly compensated employees who are currently making less than $107,432 and do NOT meet the full criteria for executive, administrative, professional, outside sales, or computer-related exemptions. The 10% catch-up rule does not apply to highly compensated employees, as they must be paid their full salary without regard to incentive pay. See DOL Highly-Compensated Workers Exemption Fact Sheet.
Review New FLSA Policies and Processes
Ensure you have systems in place to monitor and record nonexempt employees’ hours. Businesses need to proactively monitor each employee’s work hours to ensure accurate hourly pay and adhere to the FLSA’s minimum wage and overtime requirements. There are no specific federal requirements for tracking and recording hours, as long as the method is complete and accurate. One effective way is to implement an automated time and attendance system that continuously tracks hours worked and sends an alert when an employee nears the overtime threshold. These notifications give managers time to make staffing shift adjustments before the week is up.
Employers should review policies in their employee handbook, including timekeeping and overtime policies and practices, to determine whether revisions will be needed to comply with the new rules and to make sure adequate safeguards are in place to control overtime costs. If not already in place, you might consider implementing a policy to require approval before working overtime hours. Note, a lack of support of overtime does not eliminate the employer’s obligation to pay overtime if worked. Training and clarification of policies and time-tracking procedures required for employees reclassified as nonexempt employees.
Employers in states with wage and hour laws that are more restrictive in their application (e.g., CA, NY, AL, ME) need to review their coverage requirements under federal law in light of these proposed changes.
Address working from home or otherwise away from the workplace. Including checking emails and conducting phone calls, as this is considered a compensable time for nonexempt employees. If applicable, also review travel policies for nonexempt employees, including how compensable time is defined and paid
Consider Options and Implement Changes by January 1, 2020
For employees affected by this new rule, employers should determine whether it is beneficial for the business to increase salaries, adjust work duties, or reclassify and pay over time. Employers might also consider changing the hourly rate (as long as the new price meets state and federal minimum wage requirements), so that total compensation remains the same even with overtime pay. A proactive reclassification is less likely to raise concerns if an employee was misclassified or should have been paid overtime. Keep in mind that factors such as employee morale and retention should also be part of this evaluation. Any change in compensation or classification can have a negative impact if not properly communicated.
Employers are encouraged to look at their overall compensation philosophy and strategy when adhering to this new rule. Here are some determining and practical things to consider when deciding how your business will comply:
- Raise income to meet a new level
Once you identify exempt employees making less than $35,568, determine whether to establish a range whereby those employees close to the new threshold will get a pay increase to maintain exempt status. Or whether the approach will be to reclassify all employees whose current salary is below the new minimum as nonexempt.
If you raise an employee’s income to retain the exempt status, they must also meet the duties tests. This option is best for employees who have salaries close to the new salary level and who regularly work overtime. As stated, the salary minimum may include up to 10% in the form of nondiscretionary payments.
- Reclassify as Hourly or Salaried nonexempt— You may choose to reclassify exempt employees below the salary limit to hourly nonexempt. Their converted rate of pay could be a division of their salary price by 2,080 hours, or it could be lower to accommodate overtime anticipated to be paid. Estimate average overtime to be earned and determine whether to reduce base pay to compensate for overtime to be paid. Also, consider whether reclassifying employees as nonexempt might affect eligibility for certain employee benefits, such as paid time off accrual, holiday pay, etc.
You may choose to pay impacted employees as salaried nonexempt. Employees would continue to earn an established salary but would track and be paid overtime pay for any hours worked over 40 in a week (or per state law). This option is ideal for employees who work 40 hours or fewer in a typical workweek and rarely work overtime.
- Determine what approach to take in setting nonexempt pay rates – Employers need to understand how many hours nonexempt employees are currently working per week so that pay can be structured going forward with reasonable accuracy. Employers can calculate the current weekly salary divided by 40 to determine an hourly rate. If it makes sense for your business, make an effort to calculate pay rates by including the possibility of overtime compensation.
- Highly compensated employees – Determine whether those positions meet all the exemption test requirements under the DOL executive employee exemption. The special rule for highly compensated employees requires employees to earn a total annual compensation of at least $107,432, and it must include at least $684 paid weekly on a salary basis.
- Review of Job Descriptions and Duties – Determine if operational changes need to happen as a result of the reclassification, including changes to job duties, changes to schedules, and changes to staffing levels. This is the time to review and update job descriptions.
- Hiring Needs – For positions that often result in overtime pay, employers should consider hiring more full-time, part-time, and seasonal employees, or restructuring their workforce to offset a potential expansion of overtime pay.
- Overall FLSA Review – Complete a company-wide audit of all positions to determine whether to reclassify other positions at this time to manage risk and ensure compliance.
Communication is Critical
Be proactive now and come up with a communication strategy. Communicate these changes in advance to employees and consider how these changes might be perceived, especially if there are changes to pay and/or corrections to classifications. Communicate and have employees acknowledge any new handbook policies associated with the changes.
Explain to employees why these changes are happening and relate it to your business strategy and goals. Be prepared to address employee concerns about the potential perceptions of demotion or loss of status, loss of flexibility or income potential, or other possible adverse reactions. This may be an excellent opportunity to revisit the company, department, and individual goal-setting plans.
Train Leaders and Supervisors
Train leaders and supervisors on all policies and procedures associated with overtime rules, time tracking, and other associated issues. Address what constitutes compensable working time, disciplinary processes for unauthorized overtime, and ways to address complaints associated with these changes. Also, work with management to review and update to ensure the company has accurate job descriptions.
Legal Implications – What is the risk of doing nothing?
There has been increased DOL audit activity in recent years. When employers violate DOL rules, including overtime pay, they face increased risk of audits, fines, back compensation, potential accumulated interest, personal liability, and even imprisonment. Employers cannot afford to be complacent about the new rule and are strongly encouraged to be prepared for this rule change.
The most important thing for business owners to remember is to take proactive steps now to be prepared and to implement good HR and business practices that allow for quick, effective change in practices. Business owners need to evaluate their organizations to understand which employees may be affected. Consider implementing time and labor tools that monitor employees’ hours, review employee handbooks and policies, implement appropriate changes, and effectively communicate to ensure compliance.
By Kay Gillespie, HR Business Partner, HR Service, Inc.
Contact HR Service, Inc., for assistance with your HR Solutions, including legal compliance, FLSA classification of employees, timekeeping and overtime policies, employee handbooks, leader and employee training, and employee communications.