Unless you have been hiding under a rock, or stranded on a desert island, you have likely heard the news that the Department of Labor (DOL) recently modified the Fair Labor Standards Act (FLSA) exempt classification salary threshold from $455 per week to $913 per week.
We can thank the FLSA for several of the most critical worker protections in place today. The FLSA established the federal minimum wage, created youth employment standards, and required overtime pay for employees working more than the standard hours in a work week. In general, employees are guaranteed to be paid at least the federal minimum hourly wage, and receive overtime pay at one half times their regular pay for all hours worked beyond 40 hours per week, unless classified as an exempt “white collar” worker.
To qualify as exempt, a worker must fall into one of six exempt categories: administrative, executive, professional, computer, outside sales or highly compensated employee, and receive a pre-determined and set salary. The Final Rule focuses primarily on updating the salary and compensation levels for administrative, executive and professional workers. Each of the exempt categories is defined by a series of distinct tests which, to pass, must show the individual is highly-skilled, exercises a considerable control over his own hours and duties, and significantly impacts the employer’s earnings or manages a team and is tasked with hiring, firing, scheduling, and performance assessment responsibilities. The tests and salary threshold were designed to exclude from overtime protections workers who have enough discretion and power to negotiate work hours, autonomy over work decisions, and earn an income that reflects their job status, making overtime protections unnecessary.
Unfortunately, time has tempered the law’s effectiveness. With only two minimal salary updates and no substantial changes over the past 40 years, the rule was considered outdated and punitive towards many hardworking Americans and their families. For example, the salary threshold, which generally determines whether a worker qualifies for overtime, stood at $23,6601, a wage below the current poverty level for a family of four. That meant an entry-level manager who may have only marginally increased responsibilities in comparison to his/her direct reports or hourly co-workers, could work 60 or 65 hours a week and receive no overtime pay simply because he was classified as a manager.
Despite industry trends showing marked increases in worker productivity over the last few decades, wages of middle and lower income workers remain stagnant. Industry experts say the flat wages can be directly attributed to the outdated FLSA rule. The government’s failure to keep the salary threshold in pace with inflation meant many workers with very low salaries were working excessively long hours, but excluded from receiving overtime pay. These individuals are the very workers the law was designed to protect.
Pledging to bring the minimum salary threshold in line with the times and restore overtime protections to many deserving workers, Obama directed the DOL to overhaul the FLSA rule. On May 18, 2016, after an extended comment period, the DOL announced changes to the existing salary threshold. With this salary update, overtime protections may be extended to an additional 4 million workers who don’t currently qualify under the existing test. While originally contemplating a 40th percentile approach, which the DOL argued set a clear demarcation between an exempt level worker and his/her non-exempt colleagues, the DOL settled on a more modest increase to $917 per week or $47,476 per year. The rule has built in annual inflation increases to avoid setting the salary level at an amount that could eventually become outdated like it is now. The DOL will adjust the wage every three years, beginning in 2020, to reflect the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage U.S. census region, which is currently the South. The revised rule more than doubles the salary one would need to remain an exempt worker, but has made no definitive changes to the existing duties test. In addition to satisfying one of the duties tests, a worker must be paid a pre-set salary that is not subject to reduction due to fluctuations in work. The DOL has also increased the salary threshold for highly compensated workers to $134,000, up from a salary of at least $100,000 per year. An additional bright side to these changes, the DOL is allowing employers to use non-discretionary bonuses and incentives to satisfy up to ten percent of the minimum salary level. However, the DOL has set specific limitations on their use. In order to qualify, the bonus or incentive must be paid on a quarterly or more frequent basis. Annual or bi-annual incentives would not qualify. Employers have until December 1, 2016 to come into compliance with these changes. However, as we all know, December 1st will come quickly.
Where to Begin
Now is the time to begin a comprehensive job analysis that will help drive critical business decisions moving forward. It’s not enough to look at employees falling below the salary minimum. Jobs that fall within salary ranges below the current salary threshold should be also be reviewed. Begin by analyzing the job description. If necessary, have managers clarify job duties, especially for those positions falling at or just below the new salary threshold. Now is the time to determine if any existing jobs previously categorized as exempt, do not, in fact, qualify as exempt. Any jobs misclassified as exempt must be converted.
If the job does meet one of the duties tests, employers will need to determine whether the financial impact will be greater leaving the job exempt or converting it to non-exempt. Employers should carefully evaluate which employees will remain exempt, receive a bump in pay and which will lose their exempt status and be converted to non-exempt (jobs between $23,660 and $47,476), making them eligible for overtime pay.
Calculate the Overtime Estimate
Employers will want to interview managers to get an accurate estimate of the potential overtime worked by the impacted employees. Because it will likely take some time to conduct these interviews, it may make sense to perform a preliminary cost analysis using 1, 2, 5 or ten hours of overtime to help get an estimate of the potential budget implications. Once employers have gathered actual overtime hours worked by these individuals, they will want to perform the actual “real time” cost-analysis.
HR, Legal, Finance, Payroll and other HR staff (Compensation, HR BPs, HRIS) will want to develop a project plan, identifying key stakeholders, impacted processes/policies, general financial impact, recommended changes, potential communication strategy, compression impact, pay equity and other outcomes that could result from this substantial organizational change.
Identify Policies Impacted by the Change
Upper management, and HR, in particular, will need to determine the organization’s stance on newly converted non-exempt employees working off site, using company network devices (cell phones, laptops, tablets), recording hours worked, working outside normal office hours, and retaining remote access privileges. Certain non-exempt positions may dictate the need to work outside of normal office hours. Employers will need to determine what processes/policies must be put into place to ensure that time worked is recorded and paid.
Employers should hold meetings (in-person, webinar, phone-conference) to educate key stakeholders about the FLSA, and how these changes will impact the organization. A manager who is unprepared or uneducated about the changes could unintentionally communicate the wrong information.
Perhaps the single most important factor impacting this FLSA change, outside the job and overtime analysis, is building a credible and well thought out communication strategy. How the organization communicates these changes to the affected employees may vary by division and, in some cases, department. Human Resources will want to lead and drive those conversations, but will need to partner with key stakeholders. The conversation must clearly communicate that this change is a requirement, is meant to provide overtime protections, and is not a reflection of the employee’s professionalism or past performance. When preparing for the conversations, employers should consider potential questions (why is this happening, am I being demoted, or is this a reflection on my performance, etc…) and come ready to answer those questions. Helping employees understand that most employers are having to implement these same changes, and that the FLSA was established to protect workers, can go a long way in helping mitigate any employee morale challenges that may occur as a result of these changes.
HR should design training to educate managers on wage-hour laws impacting non-exempt workers, including time tracking, lunch and break time laws, and compensable time requirements to help managers avoid unknowingly violating a state or federal law.
1. Middle Class Economics: Rewarding Hard Work by Restoring Overtime Pay?