Earlier this year, the U.S. Department of Labor (DOL) proposed changes to the Fair Labor Standards Act (FLSA) regulations for white-collar overtime exemptions. After the agency decides that a regulatory action is needed, it publishes a Notice of Proposed Rulemaking in the Federal Register and solicits comments from the public. Once the agency considers the feedback, it will make any changes deemed appropriate, and then publish the final rule in the Federal Register with a specific date the rule is effective and enforceable.
Currently, per the FLSA, employees with a salary less than $23,660 per year ($455 per week) must be paid
overtime if they work more than 40 hours per workweek. The proposed rule would raise the salary threshold to $35,308 per year ($679 per week). Additionally:
- The rule would allow non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of that standard salary level.
- There are no automatic salary updates.
- Increasing the salary cutoff for highly compensated employees to $147,414 from $100,000. Workers who earn at least this much may qualify for exempt status if they meet a reduced duties test.
- The exempt duties tests do not change.
Although the proposed rule is anticipated to be effective around January 2020, employers can take this time to review their practices. Some common mistakes employers can make with the FLSA are misclassifying employees, withholding pay, and miscalculating overtime.
- Misclassifying employees: Incorrectly classifying an employee as exempt instead of non-exempt
- Withholding pay: Failing to compensate for activities considered work time or making improper deductions from a paycheck, for example
- Miscalculating overtime: Failing to base overtime pay on the regular rate of pay, which is defined as total compensation divided by total hours worked
Make sure employees are properly classified, and since responsibilities can change, regularly review exempt employees to make sure they continue to meet the duties test that applies to their position. Comply with the FLSA and state and local labor laws, and pay employees correctly.
After reviewing practices for compliance, employers will then want to conduct an analysis of the impact that the proposed overtime rule would have to their business.
- Evaluate each exempt employee’s salary level.
- If the salary is less than the new minimum, evaluate the employee’s average work hours. How many hours does the job entail based on the current duties?
- Consider changing the employee to non-exempt, look at re-assigning some duties, if needed, to minimize overtime, and pay overtime if that option is less expensive than changing their wages to meet the new threshold.
- If paying overtime would be more expensive than changing their wage, then consider keeping them exempt.
- If utilizing a list or schedule of pay ranges for employees, be sure the minimum salary paid is updated to at least the new salary threshold and examine potential salary compression.
Employers should look beyond the financial impact and contemplate other considerations when completing an analysis. Changing an employee from exempt to non-exempt will require training the employee and their manager about timekeeping requirements and meal/rest breaks. Employers must track all hours worked, retain time and attendance records, and begin paying overtime for hours worked beyond 40 in a workweek.
Consider perceptions of fairness and the effect on morale as you decide on your plan to comply with the proposed regulations. When the proposed rule is final, think about the impression on employees as you communicate changes to pay or classification. These changes could have a significant impact to your compensation budget so it is a good idea to start getting ahead of this issue before 2020.
In this tight labor market, staying ahead of these changes and preparing for the impact may also provide an advantage in recruiting and retaining the best talent. But employers do not need to make any changes yet; we will see what the final threshold will be and any other adjustments to the final rule in the Federal Register.
In an upcoming blog, we will look at some scenarios to consider and suggestions for communicating with employees about these regulatory changes.
Employment law changes are one of the most difficult areas of HR to navigate, especially as those changes relate to wage and hour guidelines. Additionally, some states and localities have extra rules to consider. When you partner with FrankCrum, you gain access to a team of HR consultants, known as FrankAdvice. To learn more about FrankAdvice and the other PEO services offered at FrankCrum, call 800-277-1620.