written by Michael Wirth

changes to overtime rulesIn 2014, President Obama instructed the Secretary of Labor to reform overtime regulations to reflect the original intention of the Fair Labor Standards Act (FLSA), and to streamline and improve the rules in order to simplify them, making it easier for workers and businesses to put said rules into action.

In response, the US Labor Department proposed a rule to increase standard salary levels for executive, administrative, and professional exemptions, as well as increasing the minimum total annual compensation level for the “highly compensated employee” exemption under the FLSA.

According to the Department of Labor’s website, the final rule, which becomes effective December 1, 2016, will include the following changes:

  • Raising the salary threshold indicating eligibility from $455 to $913 per week, or $47,476 annually.
  • Automatic adjustments to the salary threshold every three years based on wage growth data.
  • Strengthening overtime protections for salaried employees that are already entitled to overtime.
  • Greater clarification of rules for both workers and employers.

With the first half of 2016 behind us, and regulations slated to take effect December 1, human resource departments and small business owners should take the time to assess their current employee labor pool and compensation plans to ensure compliance with these new requirements.

Here are a few things for business owners to think about when planning for the upcoming changes.

Consider Reviewing Employee Classifications
Employers need to make sure they understand FLSA rules in determining an employee’s classification (exempt vs. nonexempt status) and compensation structure. Employee classification determination will still revolve around satisfying three exemption criteria referred to as the “salary basis test”, the “salary level test”, and the “standard duties test.” The “standard duties” of employees performing executive, administrative, or professional duties as described in the regulations are not changing from present law. However, employees whose current salaries don’t meet this threshold would most likely be considered nonexempt employees under the new rule changes, and therefore, be eligible for overtime. Depending on the business and staff size, this change could have a substantial effect on personnel costs.

Invest in Tools to Monitor Employee Hours
There is an upfront cost to buying an automated time system or upgrading a present system. But leveraging technology to monitor employee hours and make staffing decisions might be a solution to avoid costly overtime wages. An automated time system that continuously tracks employee hours and sends alert notifications when an employee nears the 40 hour-per-week threshold could give business owners time to evaluate and realign staff hours for the remainder of a work week.

Converting Employees to Hourly Pay
For employees who aren’t always working a 40 hour work week, but are presently an exempted salaried employee, it may make sense to convert them to a nonexempt hourly pay status by paying them for actual hours worked and any overtime hours they incur during heavier workload periods. However, this change would come with the additional administrative burden of monitoring an employee’s work hours on a weekly basis. This change may very well affect an employee’s payroll deductions, time off and other aspects of employment, too. Consideration should be given to the negative perception an employee might have from changing to an hourly wage. While not intended to be a demotion, it may be viewed in that manner. Advance communication of changes will be key in making a successful transition from salaried to hourly compensation arrangements.

Pay More to Reduce Costs
While it may appear oxymoronic, implementing a strategy of increasing salaries could save employers from the potentially higher costs of overtime pay and additional administrative burden. A business employing legitimately exempt employees who currently make less than $47,476 annually and consistently work more than 40 hours per week could save money in the long term by increasing salaries above the minimum salary level requirements. To determine if this is a good strategy to implement, businesses should first review current job descriptions and duties in relation to applicable FLSA regulations and ensure that employees qualify as exempt personnel. Then, the employer can calculate how each employee’s increased salary would compare to the estimated overtime costs that would otherwise apply given that particular employee’s typical work week.

The most important thing for employers is to be proactive in preparing for the upcoming changes to overtime rules. Employers should take a second look at those positions within their organizations that may be affected by the new rules, consider the necessity of implementing new technologies to monitor the number of hours employees are working, and determine if any changes need to be made within their organization to maintain compliance.

Many, if not all, of the points above can be implemented with no outside help. However, additional help can be sought from outside human resources and employment law experts for more complex situations and clarification of “gray areas.” Ultimately, the success or failure of any changes made to remain in compliance with regulations will depend upon open communication between management and employees.

Please contact us if you have any questions 417-881-0145.