Big changes could be coming to business payrolls across the country. A recent change to the federal Fair Labor Standards Act (FLSA) white collar exemption rule means the U.S. Department of Labor (DOL) seeks greater protection for certain lower-paid executive, administrative and professional (“white collar”) employees who are currently exempt from overtime, though likely work more than eight hours a day (in select states) or forty (40) hours each week.
The DOL has always maintained that employees who work overtime should be paid for their extra hours. If not, the employer must prove that they are exempt.
Since 2004 (the last time the DOL updated the regulations), companies have had to pay white collar employees overtime if they made under $455 per week or $23,660 a year.
Effective Dec. 1, 2016, the minimum salary increases to $913 per week or $47,476 annually. The salary threshold for exemption will also increase every three years to match inflation.
This change will make 4.2 million additional salaried white collar American workers eligible for overtime pay, according to the DOL.
After the effective date, for white collar employees to be considered exempt from overtime, they must still:
- Be paid on a salary basis not subject to reduction based on quality or quantity of work (“salary basis test”) rather than, for example, on an hourly basis
- Meet the minimum salary level (“salary level test”)
- Have a primary job duty that involves the kind of work associated with exempt executive, administrative or professional employees (the “standard duties test”)
Now is the time to research how the new white collar overtime requirements will affect your payroll and to prepare to make any changes before Dec. 1, 2016.
Let these tips guide your planning.
What to do: research
First, do your research and figure out how many employees this affects:
- Review your job descriptions and pay by role to verify your employees currently classified as exempt will still be properly classified under the new rule. Again, you are confirming that each role meets all three of the exemption criteria – paid on a salary basis, paid at the minimum salary level or above, and primarily performing executive, administrative or professional job duties. It may help to break this task down into the following steps:
- Look at your largest employee base by role first. For example, if you own a consulting firm, and 95 percent of your employees are consultants, check that position before any others.
- Then, look at any supervisory positions with lower pay. For these roles, it’s especially important to make sure they pass the standard duties test.
- Finally, pull a salary report to catch any other affected roles under the minimum salary threshold of $47,476. If you classify any role paid under that amount as exempt, it needs to be checked against the new rules.
Once you know which positions (if any) will not meet the minimum salary level of $913 per week after Dec. 1, get an idea of how much overtime people in those roles are actually working. You should be able to quickly pull a report with this information from your payroll records.
Highlight any positions where the employees consistently work more than forty (40) hours a week. This information is important because you may find it less expensive to bump up salaries to the new minimum of $47,476 than to pay overtime as long as the employee’s duties otherwise meet the “duties test.”
In many smaller companies and startups, people wear a lot of hats, so there’s more risk and gray area when it comes to establishing the standard duties for a role. These companies will need to get an accurate understanding of how these employees most often spend their time. The regulations do not require you to document or rewrite job descriptions, but it is a good practice to update them as part of your review process.
What to do: planning
If your research shows you that some of your employees will become overtime-protected after Dec. 1, you’ll need a plan so you can budget and communicate accordingly.
The DOL recommends these four options to address the changes:
1. Increase salaries of true management employees to meet the new minimum
As long as the duties test is met, this makes sense for employees whose salaries are already close to the new salary level. This is also a good move if projected overtime pay costs plus base salary for a position would add up to more than $47,476 annually.
Bringing salaries up to the minimum maintains these employees’ exempt status and negates their eligibility for overtime.
2. Pay overtime after 40 hours
You also have the option to reclassify affected employees as non-exempt and hourly. You can still pay non-exempt employees a salary and then pay overtime for hours worked beyond 40 in a week. There are several ways to pay a salary plus overtime – see pages six and seven of the DOL’s Guidance for Private Employers on Changes to the White Collar Exemptions in the Overtime Final Rule for a thorough understanding of your options.
This choice requires an accurate time tracking system. As long as it is complete and accurate, you may use any method to record hours worked.
Don’t forget to factor in the time it will take to add new users to your timekeeping system and train any newly overtime-protected employees to use it.
Don’t have a timekeeping system? You’ll have to decide how you’re going to track non-exempt employees’ hours – on paper or electronically?
3. Reorganize workloads, adjust schedules or spread out work hours
For example, assign tasks that are predictable at the beginning of the workweek to manage overtime hours. For an employee who typically works Monday—Friday that means loading up the most essential tasks earlier in the week so that “extras” are left for Friday afternoon.
If your non-exempt employees only work overtime seasonally, it may be less expensive to hire seasonal temps than allowing regular staff to work overtime.
4. Adjust wages
You can adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime so that the total amount you pay the employee remains largely the same.
For example: A supervisor at a golf club satisfies the duties test for the executive exemption and earns $37,000 per year or $711.54 per week. For a 40-hour workweek this salary is equivalent to almost $17.80 per hour. Additionally, the supervisor regularly works 45 hours per week. Instead, you may choose to pay this supervisor an hourly rate of $15 and pay time and one-half for the five overtime hours worked each week. That’s $600 (for 40 hours at $15 per hour) plus $112.50 (for five overtime hours at $15 x 1.5 per hour), which comes to $712.50 per week.
You can’t, however, reduce an employee’s hourly rate below the highest applicable minimum wage (federal, state or local), or continually adjust wages each workweek to manipulate the regular rate.
The employees’ hours must still be tracked, and you must pay overtime according to the actual number of hours worked each week.
When considering your options, be sure to reclassify for the position, not just for one person.
Communicate any payroll changes
Plan ahead on notifying your employees of any changes to their exemption status, wages or time tracking expectations, and show sensitivity to the fact that many employees prefer to be salaried and exempt (because they can see needing to track their hours and being in an hourly role as being in a lower-level position).
Certain states require that an employee be notified in writing regarding changes to his or her rate of pay, i.e., California. Even where written notice is not required by law, consider providing a written notice, and then decide whether to have one-on-one talks or a group meeting to follow up, depending on the number of affected employees each manager has.
All communication should thoroughly explain why the changes are being made and any new requirements for reporting working hours (e.g., “Your job duties aren’t changing; your position will be considered hourly with overtime [non-exempt] or salaried [exempt from overtime] from Dec. 1 forward due to changes in federal labor laws.”)
Behind the scenes, your efforts should involve joint communication between payroll, HR and your managers. Your managers should own all discussions with employees about the changes, and if there are issues, keep everyone in payroll and HR informed.
Focus on the positive
The more you know about what your employees are currently doing and how they’re working, the easier it is to come up with the right strategies to manage any matters related to HR compliance.
Putting these changes in place and reviewing your employees’ actual duties gives you an opportunity to formalize or update job descriptions. Cleaning them up for the DOL and FLSA changes could help you clean up other areas of risk, too, if done properly.
Seeking a better understanding of HR compliance issues? Download our e-book, Employment Law: Are You Putting Your Business at Risk?, to find out how to avoid 6 common employment law mistakes.