The U.S. Department of Labor (DOL) recently published significant changes to the rules governing whether an employee is entitled to overtime compensation. The change may affect 4 million employees who are currently exempt from overtime pay requirements. All employers will have to comply with the changes made to the overtime regulations of the Fair Labor Standards Act (FLSA) by December 1, 2016.
The salary floor for FLSA exemptions has been raised to $913 per week, or $47,476 annually. The salary floor is currently (and has been for some time) $455 per week, or $23,660 annually. What does this mean? Under the new rules, employees who pass the “standard duties” test and who are paid a salary more than the old salary floor of $23,660 but less than $47,476 would be reclassified as non-exempt and then subject to overtime and other protections of the FLSA. Overtime requirements differ for tipped employees and may vary by state and municipality.
Changes to the Highly Compensated Employee Exemption
The new changes to the FLSA regulations will also affect the Highly Compensated Employee exemption. Pursuant to FLSA regulations, employees are included in the Highly Compensated Employee exemption, which means, among other things, that they are not entitled to overtime pay if they: (a) customarily and regularly perform exempt duties; (b) are paid over an amount determined by the regulations (increasing from $100,000 to $134,004); (c) perform general office work related to business operations; and (d) exercise discretion regarding important business matters. This exemption typically applies to individuals who work in an office setting and are paid a combination of a base salary and commission and/or nondiscretionary compensation. It is a unique exemption because an employee may be exempt from overtime even though the employee would otherwise be entitled to overtime under the standard duties test, if the employee makes over $134,004 and customarily and regularly makes important business decisions, such as directing the work of two or more other employees.
Deadline for Compliance
The effective date for the newest changes is December 1, 2016. That means employers will need to ensure compliance in approximately six months. The DOL gave organizations more time to implement changes than is required by law, which is 60 days.
An FLSA Action Plan
Consider taking the following steps to prepare for the deadline:
1) Assess the current state of local, state, and federal law, and review classifications. Keep in mind that each state or municipality may enact regulations that differ from federal regulations; employers will be subject to whichever set of directives is more generous to employees.
2) Closely manage and monitor employee hours. Review your current records for the number of hours your employees are working, and create a budget projection to ensure that you will be financially able to maintain your payroll and to plan for any changes that will be required to meet budget projections.
3) Compare the costs of various pay options. For those employees whose salary is already close to the “Highly Paid Employee” exemption rate, weigh the costs of raising employees’ salaries to meet the exemption criteria against what it would cost to reclassify them as nonexempt and pay them overtime when they work more than 40 hours per week.
4) Consider the impact on internal pay equity. Beyond the costs of raising exempt employees’ salaries, consider the impact on internal pay equity. If you substantially increase some employees’ pay, other employees may have questions about why their pay isn’t increasing. The change in the law creates a good opportunity for your company to review its policies to ensure it is treating employees equitably.
5) Proactively control costs. Develop alternative strategies that make it possible to shift expensive overtime hours to other workers who can be paid at a regular or lower rate. Monitor fluctuations and patterns in the volume of work, and align employee schedules accordingly, so that work can get done without creating overtime situations.
Must-Read Articles of the Month
 Please note that overtime generally means compensation at rate of 1.5 times the employees’ normal rate of pay.