Prepare your agency for the new policies that roll out in December
It could have been much worse for employers. The final overtime exemption changes are more employer-friendly than initially proposed. The compensation threshold amount is smaller, employers can use a portion of an employee’s nondiscretionary bonuses in determining the total compensation threshold, the time to implement the changes is longer, and the “duties” tests under the FLSA were not revised. That’s the good news. As such, however, the revised overtime pay rules are estimated to affect at least 4.2 million workers and will impact many businesses subject to the FLSA.
Your clients will be looking to you to help them make sense of the new regulations and help them plan their strategy for managing the possible increase in their total compensation costs. December 1st is fast approaching, and what follows is the information you need to be ready to comply with the new rules.
What is changing?
- The salary threshold needed to qualify for the overtime exemption for the “executive, professional and administrative” categories doubles from $455 per week ($23,600 annually) to $913 per week ($47,476 annually).
- The regulations reset the annual compensation threshold for “highly compensated employees” from $100,000 to $134,004 annually.
- The level will automatically update every three years to maintain a compensation threshold equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region (currently the South).
- For the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) paid on a quarterly or more frequent basis to satisfy up to 10% of the standard salary level.
- The new rules are effective December 1, 2016.
Potential impact for your agency and your clients
Now for the bad news. This compliance change poses special challenges for businesses paying lower wages for supervisory and skilled workers currently classified as exempt from overtime in certain industries, such as nonprofits, retail, services, hospitality and seasonal businesses. While some analysts claim that the new rules will hit smaller businesses the hardest, geography and industry type are also big factors. For example, small high-tech startups in Silicon Valley are less likely to have exempt employees earning less than the new salary threshold, while white-collar supervisory or professional jobs paying $45,000 per year and considered well-paying in other parts of the country will be impacted by this change. Giving those employees raises to bring their pay up to the new salary threshold or paying them overtime could severely limit the businesses’ operations and growth.
For example, according to a recent National Retail Federation study, the new rules are projected to drive up retailers’ payroll costs, causing employers to limit hours or reduce base pay to compensate, and increase the use of part-time workers to cover the extra hours. We’re hearing the same concern from our broker-partners and their clients across the country and in various industries. In fact, since the new regulations were announced May 18th, we have received more than 400 questions from brokers and employers requesting assistance in understanding their options for compliance.
For companies with compensation programs that bundle salaries, incentives and benefits in the total compensation mix, these new rules could reduce the budget for benefits programs to compensate for higher salaries as a result of more overtime being paid or salaries raised to meet the new threshold. Your clients could be looking to you for creative and affordable benefits options to manage their total compensation budgets.
Six planning tips for successful compliance
- Analyze current baseline compensation. Analyze the salaries of employees who may be affected by the new overtime rule and forecast increased salaries and overtime costs.
- Determine which employees are exempt at an annual pay rate of less than $47,476. If those employees receive nondiscretionary bonuses, factor 10% of those bonuses into the total compensation rate.
- Consider whether to raise these employees’ pay to meet the new threshold of $47,476 to maintain exempt status or budget for potential additional overtime expenses with the reclassification to nonexempt status.
- Review historical overtime worked by these employees to estimate the potential additional overtime expense to add to the budget. Don’t forget to include meal and rest periods, travel time, training time, and other hidden overtime in that analysis.
- Consider compensation options based on budget and company operations.
- Raise pay for exempt level positions to at least $47,476 annually.
- Reclassify positions to nonexempt overtime-eligible status and pay overtime as worked, and leave current salary as is.
- Reclassify positions to nonexempt overtime-eligible status but reduce current base pay rates. Pay overtime as worked so that the employee takes home the same amount of pay for the same time worked.
- Reduce hours worked to eliminate overtime.
- Hire additional part-time staff to work the extra hours.
- Review benefits. Assess group benefits plans and paid time off/leave policies (for example, sick and vacation) to determine how each may be impacted by eligibility and accrual differences for exempt and nonexempt workers. Consider how the company will best manage the transition from one accrual method to another.
For example, if an exempt worker accrues based on weeks worked up to three weeks of paid time off (PTO) a year, but a nonexempt worker will only accrue for hours worked up to two weeks of PTO a year, the company may experience frustrated workers and face retention concerns due to a loss in benefits under the leave policy.
- Consider the impact on remote workers and telecommuters. A change from exempt to nonexempt status may also impact those who work from home. Determine whether telecommuting is feasible for the company’s nonexempt employees, and make sure to evaluate methods to measure time and productivity, as well as ensuring meal and rest breaks are taken appropriately for those employees in states that have defined meal and rest break rules.
- Craft communications messages carefully. While not just about money, these changes could trigger potential employee relations issues. This is a great opportunity to talk with employees about the company’s pay strategy and what the organization values. Reinforce that the regulatory definitions of overtime exemption status are not important in how the company evaluates each employee’s worth to the organization. How the changes in classification status and rates of pay are communicated to employees will have a lot to do with the company culture, pay philosophy, and style of communication. Face-to-face communication is generally the ideal method when discussing compensation.
Keep in mind that many exempt employees view earning a salary as a rite of passage—a declaration of their professional status. Notifying an individual that he or she will now be required to “punch a timeclock” will require some forethought and finesse to ensure that the message is not interpreted as a demotion or as a loss of status. The employee’s perception of this change in classification will be amplified if these employees are no longer able to work the longer hours that had allowed them to feel a part of significant business contributions.
While some analysts claim that the new rules will hit smaller businesses the hardest, geography and industry type are also big factors.
The company may also have to consider whether there is a need to make any structural changes in the organization to (1) reflect having exempt and nonexempt employees with similar job titles and duties or (2) amend policies that once applied only to exempt supervisory positions. How managers communicate those changes will set the tone for discussions regarding organizational goals and objectives and each employee’s contribution to those goals.
- Train managers. Most important, make sure to brief the management team about the changes that need to be made, including not just the “what,” “how,” and “when,” but also the “why” so that the company’s intentions are communicated in a way that demonstrates thoughtful consideration of the alternatives, respect for employees, and alignment with the company’s culture and strategic objectives.
Start now, consider your options carefully, and show your clients the value you can bring to this potentially difficult—and expensive—HR compliance challenge!
Need additional information regarding the new overtime rule? Contact Laura Kerekes at firstname.lastname@example.org for a free copy of our FLSA White Collar Exemption Fact Sheet and E-book of frequently asked questions and answers on this topic.
Laura Kerekes is ThinkHR’s Chief Knowledge Officer and leads the ThinkHR content knowledge and human resources service delivery teams. In addition to her company responsibilities, she writes management, human resources and business articles and presents regularly to management groups regarding human resources best practices.
About ThinkHR: ThinkHR partners with more than 650 leading insurance brokers and payroll bureaus to enable their clients to obtain quick answers to urgent risk and liability questions, protecting clients from loss and legal action; stay informed on the correct responses and decisions for HR management and compliance matters; create web training programs to educate and develop employees in the areas of safety, management and wellness; and save time and money versus expensive alternate legal and HR resources.