What Will the Overtime Changes Mean for US Employers?

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2015_7Employers across the US have been anxiously (albeit nervously) awaiting specifics on updates to the Fair Labor Standards Act (FLSA) as directed by President Obama in early 2014. The FLSA (also known as the Wage and Hour Law) regulates minimum wage, overtime, record-keeping, equal pay and child labor for covered employers.

Well, that wait is over (sort of). On June 30, 2015, the Department of Labor (DOL) formally proposed updates to the FLSA’s exemption rules for the first time in over 10 years.

Most workers are inherently subject to the FLSA’s wage and hour provisions UNLESS they meet a series of “tests.” To qualify for exemption, workers must

  • be paid on a salary basis meeting a minimum weekly salary threshold AND
  • perform certain job duties classified as executive, administrative, professional, outside-sales or computer-related (also known as white-collar exemptions)

Guidelines for highly compensated individuals (those making over $100,000 annually) are also included.

What Are the Proposed Changes?

The current minimum salary is $455 per week, or $23,660 annually. The DOL is proposing to increase the minimum salary to $921 per week, or $47,892 annually – the 40th percentile for full-time salaried workers according to the Bureau of Labor Statistics (BLS) in 2013. This is an increase of over 100%. The department is also proposing to increase the threshold for highly compensated individuals to $122,148 annually (the 90th percentile according to the BLS).

In addition, for the first time in the FLSA’s history, an updated minimum salary would be published annually, either based on a fixed percentile or the consumer price index. This means that not only will the salary threshold be increased initially, but the DOL has stated that the main objective is to raise the threshold without further rule-making to achieve the 40th percentile on an annual basis to account for inflation. If the DOL’s projection is correct, it could rise again in 2016 to $970 per week, or $50,440 annually.

Luckily for employers, there are no proposed changes to the job duties tests; although the DOL is asking for comments as to whether or not there should be changes. This may result in further changes being proposed or included in the final regulations.

What Does This Mean for Employers?

The chief impact of the proposal is obvious: substantially higher labor costs. With potentially more than 5 million additional workers now eligible for overtime, labor costs for employers may skyrocket, depending on the worker-base.

Employers who historically had a higher number of entry- to mid-level, exempt workers may see a greater impact than those who employ a majority of lower-level, hourly workers. This does not mean that the latter won’t feel the impact, as these industries also tend to pay their exempt workers lower salaries. The new threshold will likely result in salary increases for some workers, and/or the hiring of additional workers to distribute the workload.

A not-so-obvious impact is administrative costs. How will these changes affect your:

  • Internal processes?
  • Payroll administration?
  • Timekeeping practices?
  • Policy updates?

Not to mention that every time an annual minimum salary is released, employers will have to examine workers that may be impacted.

How do I Prepare for the Changes?

1. Labor Costs

First, employers should begin evaluating the impact on their labor costs now. What will the financial impact be if all workers whose compensation is below the proposed minimum salary must be paid overtime? Examine your current workforce composition to see where individuals fall.

  • Are there any workers whose salary is on the cusp and can be adjusted?
  • What considerations will need to be made when reviewing the budget for 2016?

2. Timekeeping Practices

Second, review your timekeeping practices. With the increase in the number of workers who will be subject to the record-keeping requirements, employers need to ensure that their timekeeping practices can keep up with the demand.

  • What will the impact be on your payroll processes when having to calculate overtime for the increased number of workers?
  • Is it time to take a look at that upgraded time and attendance system?

3. Job Descriptions

Third, immediately start taking a look at the job descriptions for ALL workers. Best practice is to review these annually, as workers’ job duties are continually evolving. If you have not done so in a while – there is no time like the present!

Although the proposal announced last week does not include the job duties tests, the door is still wide open. Having up-to-date job descriptions will ensure that when changes do happen, you are prepared. You may even identify individuals that you have historically classified as non-exempt that you may be able to reclassify as exempt.

4. Communication

Lastly, the changes will require an extensive communication plan, which needs to include proper documentation of any reclassifications and careful implementation and training regarding the updated policies and procedures. Newly non-exempt workers will need to be trained on timekeeping practices and what is included in hours worked. Additionally, unaffected workers need to be equally considered. Since a number of their colleagues will likely become eligible for overtime, they need to understand the changes and why they were not included.

What’s Next?

Other than preparing, all that’s left to do is wait. It’s important to note that these changes are still in the proposal stage and will be open to public comment for the next two months. However, you should begin to evaluate the impact of these changes on your organization so when they are adopted you are ready.

The DOL estimates that the Final Rule will not be released until mid-2016, since the DOL plans to “rely on data from the first quarter of 2016” in setting the final minimum salary threshold.  There are some sources, however, that are projecting it could happen end of 2015 or early 2016. Stay tuned.

 

Disclaimer: This information is provided as a consulting service only.  It is not intended to be and may not be relied upon as legal advice or opinion.  Persons needing specific legal advice should retain the services of legal counsel.


This post was originally published July 6, 2015.

About Sara Ritter

Sara Ritter, M.A, SPHR, SHRM-SCP is a Senior Human Resources Consultant with the Willis Human Capital Practice. Sar…
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