The New DOL Overtime Rules: Employers’ Next Steps
Under the Fair Labor Standards Act (“FLSA”), non-exempt employees are required to be paid overtime at time and a half for any time worked over 40 hours a week, while exempt employees are not.
On May 18, 2016, President Obama and Secretary of Labor Perez announced that the Final Overtime Rule will finally be published to the Federal Register on May 23, 2016. Under the new rule, the minimum salary requirement to classify an employee as exempt will now be raised from $23,660 a year to $47,476, and employers may use non-discretionary bonuses and incentive payments to satisfy up to 10% of the minimum salary. The salary threshold for Highly Compensated Workers was also raised from a minimum of $100,000 a year to $134,004. Furthermore, this is not a one time raise, rather, the new rule contains a mechanism that will automatically adjust the minimum salary thresholds every three years.
Employers need to take prompt action to ensure they are in compliance by December 1, 2016. Employers have a few options and lots to consider. The first and most important step that employers need to take is to review all exempt employees’ current classifications and salaries, and ask two questions:
1. How much is this employee paid? The new threshold to qualify as exempt is $913 per week or $47,476 yearly. Therefore, all employees with annual salaries between $23,660 and $47,476 will be impacted and a plan must be in place to address the situation. After answering this question, you are able to determine how many employees are subject to change under the new rule.
2. What is the financial impact? Knowing how many employees are subject to change, and the size of the gap between their current salary and the $47,476 threshold, you will be able to determine the financial impact and whether and to what extent, your existing labor cost budget can support compliance with the law.
There are several ways you may choose to handle this situation, we will discuss several of these options below.
Reconfigure Salaries, Benefits and/or Bonuses
One option is to reconfigure an employee’s salary. This may be done in several different ways. The most obvious option would be to give any employees that need to be re-classified a raise to the $47,476 salary minimum in order to maintain their exempt status, allowing them to continue to work overtime when and where needed without additional pay.
Another option is where the employee’s base salary would be lowered such that, once overtime was included, they would be making the same amount as before the implementation of the new rule. This option does not impact the employer’s labor cost budget, but does require an accurate understanding of current overtime use, and when, where and why it happens. Employers who take this approach also will need to ensure that base salaries continue to meet the minimum wage in your state, county and/or city. With minimum wages on the rise, this may prove to be a barrier to this option.
In discussing the possibility of changing salaries, you must also consider employee’s benefits and bonuses. Lowering the base salary may affect an employee’s benefits and bonuses if they are receiving them based on their salary, position, or classification. Policies and processes concerning benefits and bonuses also need to be reviewed in order to accommodate budget challenges resulting from these potentially higher wages. You may also choose to reduce benefits and bonuses in order to escalate base salaries above the new threshold.
Reorganize Your Business
Another viable option for many businesses is to reorganize your business to keep both budget and productivity
constant. Possibilities might include staff reductions, position consolidation, increasing staff to better manage or
lower overtime, or a combination of the above. You may also choose to cut workers’ hours to less than 40 hours a
week and offset those hours by hiring new employees at lower wages and/or increasing part-time employees who
work on an hourly basis. Some businesses may be able to more effectively leverage existing or new technologies
to fill the gaps caused by reorganization and possible workforce reductions.
This might also be the time for many businesses to take a solid look at outsourcing, particularly for back office functions like bookkeeping, human resources, or even marketing. These services ensure efficiency while allowing another entity to shoulder the burdens and risks of being the employer of the workers handling these functions. Vetting potential providers and ensuring a seamless transition takes time and money and should begin now.
Maintain Current State
Of course, employers always have the option to maintain all current classifications and not take any special steps to
mitigate the impact of the new rules. This option is perfectly fine and may prove to be the best option for your
organization. If your employees generally work 40 hours or less a week, then overtime may not even be a concern
for you. However, if you choose to take this route, you must be prepared to be diligent in monitoring employees’
work hours and to pay out any overtime that your new non-exempt employees accumulate.
Change Management and Communication
As with any change in a business, especially one that concerns salary, benefits, and position classifications or titles,
it is important to consider your employees and how these changes will affect them. Sometimes employees feel
marginalized or demoted when they are changed from exempt to non-exempt status, despite the fact that nothing
substantively changes in their position other than their ability to earn overtime. That said, the fact that previously
exempt employees may now, as non-exempt employees, have to ‘clock in’, could have an adverse effect or be met
with resistance. It is important to consider the message you will send to employees if changes to classification are
made and to develop a proactive change management and communication plan well in advance of December 1,
Regardless of the avenue your business ultimately might take, it is important to start planning for this change now.
Almost every employer will be impacted in one way or another and you should consider all your options, obvious or not, in determining your best solution.