On December 1, 2016, employers will have to pay more to take advantage of the Fair Labor Standards Act’s (FLSA) so-called white collar overtime exemptions. To prepare for the upcoming change, employers need to know whether and to what extent they will be affected by the new overtime exemption regulations.
The new rules focus primarily on the minimum salary and compensation levels needed to qualify for the FLSA’s executive, administrative, professional and computer employee overtime exemptions. Employers can ask the following questions to determine the potential impact of the new overtime rules before it’s too late.
Are there any employees classified as exempt under one of the FLSA’s white collar overtime exemptions? If no, you should not be affected by the higher standard salary levels under the new rules. If yes, move on to the next question.
Do any of these employees ever work more than 40 hours in a workweek? If no, you should not be affected by the higher standard salary levels under the new rules. If yes, move on to the next question.
Do any of these employees earn a salary of less than $913 per week? (This works out to $1,826 biweekly, $1,978 semimonthly, $3,956 monthly or $47,476 annually.) If no, you should not be affected by the higher standard salary levels under the new rules. If yes, exemption classifications or compensation practices need to be adjusted before December 1, 2016.
The most appropriate adjustment(s) will typically depend on specific circumstances, such as the number of newly-nonexempt employees, their salaries, how often they work overtime and how much overtime they work. Depending on their situation, employers may decide to implement one or more of the following adjustments.
Increase Salaries. Perhaps the simplest and least disruptive adjustment would be to increase the salaries of exempt white collar employees to no less than $913 per week. Unfortunately, it may also be unrealistic for many employers. Though some salary increases may be small, others may be more than double.
Those choosing this option must remember that exempt status requires more than meeting the new minimum salary requirements. Primary job duties remain relevant under the new rules and employees still have to satisfy the applicable “standard duties test” to be exempt.
Pay Newly-Nonexempt Employees Overtime Compensation. The alternative to increasing salaries is to re-classify these exempt employees as overtime-eligible employees. Those working more than 40 hours in a workweek must be paid one and a half times their regular rate. Remember that employers must track the daily and weekly hours worked by all nonexempt employees, including the newly-nonexempt.
Paying overtime compensation may not be a problem for employees who rarely work or who work very little overtime. Despite paying more for occasional overtime work, it would still be less expensive than increasing salaries. The same cannot be said about employees who regularly work or who work a lot of overtime. Their overtime pay can add up quickly, possibly approaching or even exceeding $913 per week.
Prohibit Overtime. Newly-nonexempt employees can be prohibited from working overtime. If no overtime is worked, no overtime compensation is required. This option may be simple, but it may not be easy. Exempt employees typically work more than 40 hours in a workweek because they have more than 40 hours of work to do. Their work must still get done, but someone else will have to do it.
Adjust Personnel, Schedules or Assignments. Those who prohibit overtime may have to make various operational adjustments. For example, workload distribution and workforce scheduling may need to be adjusted to compensate for the loss of overtime work. In some cases, new employees may need to be hired to make up for any lost productivity.
Adjust Wages. Newly-nonexempt employees who are allowed to continue working overtime as always will end up getting more money for the same amount of work. Reallocating regular wages and overtime compensation is a way to keep the hours worked and amounts paid to newly-nonexempt employees largely the same. However, employers may not reduce an employee’s hourly wage below the highest applicable minimum wage (federal, state, or local) or continually adjust wages each workweek to manipulate the regular rate.
Employers shouldn’t wait too long to start planning. It takes time to change exemption classifications and compensation practices, particularly if they are substantial or complex. With all the publicity, it’s safe to assume that violations will be noticed not only by those who are affected by the new rules, but by the Department of Labor too.
To protect against the uncertainty and confusion surrounding the new rules, employers may benefit from having Employment Practices Liability Insurance to protect against various employment-related claims. Limited coverage for wage and hour claims may be available.
Employers should discuss the new overtime exemption rules with HR, payroll/accounting, managers and supervisors. Specific wage and hour training should also be considered. Please contact us if you would like more information about preparing for the new white collar overtime exemption rules.
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