The U.S. Department of Labor (DOL) recently announced changes to overtime rules under the Fair Labor Standards Act (FLSA). These changes stand to impact millions of employees across the country, and it’s important for organizations to understand the rules, as well as the proactive measures they can take today to remain competitive and compliant.
Let’s take a closer look at these updates and their potential impact.
What’s Changing and When
Generally, there are three requirements that must be met for an employee to be exempt from overtime and minimum wage. If an employee is:
- Considered an executive, administrator, professional, or outside salesperson—Duties Test
- Paid on a salary or fee basis, except for outside-sales employees—Salary Test
- Paid at a minimum rate of $455 per week for a regular employee or $100,000 per year for a highly compensated employee (HCE)—Threshold Test
Effective December 1, 2016, the threshold will increase to $913 per week for regular employees and $134,004 per year for HCEs, and will adjust every three years beginning on January 1, 2020. Additionally, employers may not count incentive pay—nondiscretionary bonuses of up to 10% of employees’ salaries, for example—toward meeting the new threshold. Certain employees, such as doctors, lawyers, and teachers, are statutorily exempt from the minimum wage and overtime requirements. Other classes of employees (e.g. software developers and computer engineers) have a different threshold amount of $27.63 per hour, if they are paid hourly.
Organizations Have Options
Employers have two options for navigating these changes: 1. Increase impacted employees’ salaries to meet the new threshold, or 2. Reclassify impacted employees to non-exempt and begin tracking their time. As part of their due diligence, employers will need to analyze compliance requirements, cost components, pay-structural changes, and strategy for communicating with employees. Most employers will find that the right strategy for them is a combination of these.
Once a strategic decision has been made on how to comply with the new rules, administrative considerations come into play, including:
- Is it necessary or beneficial to create new pay codes for reclassified employees?
- Has enough time has been set aside to establish such codes and ensure proper data feeds?
- Will reclassified employees lose eligibility for benefits tied to salaried or hourly status?
- Is it better to reclassify employees to salaried non-exempt status rather than hourly status (i.e., pay overtime on top of regular salary) to limit benefit or morale repercussions?
- Have preparations been made to transition employees to using time-tracking systems?
Additional Costs, Compliance to Consider
Employers should make sure they take into account other costs associated with the overtime-rule changes. These costs may include:
- Employer taxes: FICA (employer portion of Social Security and Medicare tax), state and federal unemployment, employer-paid state disability taxes, workers’ compensation, or local business taxes (Oregon tri-county metro tax, for example)
- Employee-benefit costs attached to salary: 401(k) matching contribution, life-insurance premium, or Health Reimbursement Account matching
- Administrative costs: time and attendance administration, as well as additional processing time for timesheet approvers and payroll professionals
Finally, other preparations should be made to ensure employers avoid unintended consequences. For instance, employers should consider making pay-rate or reclassification changes effective the first day of the pay period, so as to avoid prorated calculations. It may also be beneficial to review employees’ job duties to ensure they meet the aforementioned Duties Test. Note that it’s common for employees to be paid above the threshold but still fail the Duties Test, resulting in a DOL fine.
A Proactive Approach
While employers have several months to prepare for these changes, now is the time to begin planning in order to mitigate the impact on their people and their organization as a whole.
For more information on ways to navigate the updates, check out Ultimate Software’s new infographic below, “Breaking Down FLSA Overtime Changes,” and download our whitepaper, “Understanding the Final FLSA Overtime Rules and How to Prepare.”