3 Ways Employers Should Prepare for New DOL Overtime Rule

As you probably know by now, the U.S. Department of Labor (DOL) recently announced their final rule for the Fair Labor Standards Act (FLSA) regulations for white-collar overtime exemptions. The new ruling makes 1.3 Million more Americans eligible for overtime pay. Beginning January 1, 2020, the minimum salary level for an exempt status employee is moving to $684 per week or $35,568 per year (up from the current $455 per week or $23,660 per year).

The final rule updates the earning threshold necessary to be able to exempt the classifications of executive, administrative, or professional employees from the FLSA’s minimum wage and overtime pay requirements. Here’s what employers need to know:

• Employers will be able to credit nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level.
• The highly compensated employee (HCE) exemption compensation requirement will be set at $107,432 per year.
• No changes will be made to the duties tests.
• No updates to the rule will be made automatically.

Here are three ways employers should prepare for the new DOL overtime rule.

1. Assess for Compliance

Employers can take this time leading up to the January deadline to evaluate pay practices. For example, is overtime paid correctly?  Are proper deductions made from employee paychecks? Are employees correctly classified as exempt or non-exempt?

To review whether an employee is exempt, determine which exemption applies based on the duties the individual is performing.

• Analyze the job description and be sure it accurately reflects the duties being performed.
• Meet with the employee to confirm and document that the duties are accurate.
• Review the workflow and the autonomy of the role.
• Look at prior performance reviews which show work the employee has done.

Additionally, an exempt worker (for most classifications) must be paid on a salary basis and meet the minimum salary threshold ($684 per week/$35,568 as of 1/1/20). Employers should review state and local wage and hour laws. Alaska, California and New York have exempt salary requirements that already exceed the new Federal requirements. In January 2020, Maine’s salary threshold will rise to $36,000 annually. 

Workers are presumed to be non-exempt unless the employer chooses to prove they meet one of the exemptions.  If an employer cannot clearly show that a worker meets an exemption, they should classify that person as non-exempt and pay overtime as applicable.

2. Review for Impact

As employers crunch numbers for this new rule, consider the following:

• Should salaries be raised to meet the new exempt salary threshold?
• Should the worker be changed to non-exempt status and overtime worked into the budget? Keep in mind that frequent overtime may increase pay more than if the position remained exempt and the salary increased.
• Should additional staff be hired to minimize the need for overtime?

Cost and Benefit Analysis

Part of an employer review of the new DOL rule includes a cost and benefit analysis. Assess employee hours by considering the following:

• How many hours does the job take now?
• Can it be done in 40 hours a week?
• Can some duties be reassigned if the role changes to non-exempt status?
• How much overtime may need to be worked if the role is changed to non-exempt?

For benefit eligibility and employer contribution determinations, an employer may use exempt or non-exempt status. Keep in mind that an increase in an employee’s salary may increase benefit costs to the employer for premiums such as short and long-term disability or life insurance. Employers should examine any benefits related to exempt or non-exempt status that could affect the cost and effectiveness of that benefit (i.e. PTO/sick/vacation time).

Potential Salary Compression

Raising the salaries of your exempt employees to meet the new minimum threshold may cause salary compression. Salary compression occurs when an employee’s salary is very close to the pay of those with more experience, skills or seniority. A common example is when new-hire starting salaries are close to the wages of current workers.

Increasing salaries to retain exempt status may require a look at increasing internal salary ranges as a whole. Possibly make a plan for adjustments over time if that is needed. You could also consider using small bonuses to reach the needed salary threshold per the new rule. 

Best Practices: Keep an eye on market changes compared to your internal compensation structure and make steady adjustments to salary ranges as needed.

Effects on Employees

Think through perceptions of fairness and the effect on morale as you decide on your plan to comply with the new regulations. There could be a morale issue for employees who may not get an increase, realize they need to work overtime or will receive less pay. Many workers will view a loss of exempt status as a demotion. Take into account the impression on employees as you communicate changes to pay or classification.

3. Develop a Plan

Now it’s time to develop a plan. Use the impact analysis to decide which options are preferable.

• Consider which employees will remain exempt and which will be switched to non-exempt status.
• Figure out the timing and communicate to the affected employees. 
• Provide instruction on timekeeping to employees, and their managers, for newly non-exempt roles. 
• Create an overtime policy if there isn’t one already in place.

Employee Scenarios

Here are some scenarios an employer could encounter:

1. Scenario: Carlos is an exempt employee and makes $31,500 per year.
   Action: After a review of his actual duties, Carlos’ employer decides his job meets the applicable duties test and increases his salary to the new threshold.
   Outcome: Carlos is excited to make more money. His employer accounts for the needed increase in the budget.
2. Scenario: Megan is an exempt employee and makes $29,000 per year. Adrianna is her exempt supervisor and makes $37,000 per year. Their employer is looking at salary compression by moving Megan to $35,568.
   Action: After a review, their employer decides to move Megan to $625 per week/$32,500 per year and pay 10% of her salary as a bonus to minimize salary compression with her supervisor. Their employer may give Adrianna a higher bonus, but does not feel the need to raise her salary as they would have if Megan had been paid a straight $35,568 base pay.
   Outcome: Megan understands how she will be paid and is good with her increase in base pay and new bonus compensation plan.
   
3. Scenario: Christina is an exempt employee making $28,000 a year.
   Action: After a review of the actual duties being performed, her employer decides to make the position non-exempt and continue paying the equivalent range, but at an hourly rate. Her employer moves one of Christina’s duties to another employee and expects Christina to do the job in 40 hours, without overtime.
   Outcome: Because one of her duties was taken away, Christina wonders what her employer thinks of her and what it may mean for her career path. She worries she may not be able to do the job in 40 hours.
   
4. Scenario: William is an exempt employee making $25,000 a year. 
   Action: After a review, his employer decides to make the position non-exempt and add an additional duty. The employer is expecting a couple of hours of overtime each week. 
   Outcome: William is used to doing the job in 40 hours. Even though he would be making some extra pay each week, he is disappointed on the impact to his work/life balance. He has never had to punch a time clock and does not want to keep track of his hours worked.

Communication Suggestions

Educate employees on the regulatory changes, and why this is happening. Keep it simple and straightforward. Here are some communication plan suggestions:

• Communicate via email, intranet posting, group or individual meetings.
• Consider using the words “eligible for overtime” or “not eligible for overtime” instead of “exempt” or “non-exempt” for easier understanding.
• Educate managers as they will probably be the first place employees go with questions. They may also be subject to the change while needing to communicate with others that are impacted.

Be sure to advise employees about changing policies as a part of the communication plan. Include new expectations for a newly non-exempt person. What type of work is authorized outside of regular work hours? How much overtime is authorized? Are employees used to reading and responding to email on the weekend? If so, as a non-exempt employee, that would need to be counted as time worked.

Be available and patient with employees during the transition. Treating them with sensitivity and empathy will go a long way. Here are some ways to provide assurance:

• Let employees know they are appreciated. Moving to non-exempt status is a change in how their pay is calculated, not a change in how they’re valued as an employee.
• Assure them that keeping track of their time is a legal requirement. It’s not meant to create the feeling that they are being micromanaged.
• Clarify that removing duties because of the new rule is not indicative of a lack of confidence in their ability.
• Explain that by limiting overtime (if that’s the case), employees might be able to leave work on time, which could improve their work-life balance.
• Let employees know why overtime is needed (if that’s the case) for the success of the company and remind them that if they were exempt, they would not get any additional compensation for the extra hours. Perhaps you may be able to offer flexibility when needed. 

As employers adjust to the new overtime salary threshold, understanding the FLSA basics is important to handle the changes and avoid legal issues with misclassification. If you have questions about how to classify employees or what the difference is between an exempt employee vs. a non-exempt employee, FrankCrum’s HR experts can walk you through any wage or hour issues.