On May 18, the Department of Labor released their final rule revising the Fair Labor Standards Act (FLSA) overtime regulations.  These new rules go into effect December 1, 2016 and will significantly alter employee pay structures.  Employers need to review more than just pay rates to ensure compliance with the new requirements. For example:

1. Are your managers still exempt employees?

Even under the old rule, it was not uncommon for employers to misclassify workers as “exempt” (not subject to overtime requirements) under one of the threshold exemptions: executive, administrative or professional duties tests.  However, this becomes more problematic as the prior salary threshold for exempt positions of $23,660 annually will make a significant leap to $47,476 annually (put into perspective, this is a comparable hourly wage jump from $455 to $913 per week). Employees earning less than the threshold must be paid for any hours worked at one and one-half times their regular hourly wage rate for any hours worked (in the defined workweek) over the 40 hour threshold. Classification as a professional or as a manager is not the determining factor in the threshold wage test. If your “managers” are earning a salary less than the threshold you will need to consider changing the wage or reclassifying the employee as non-exempt.

2. Are your Highly Compensated Employees still considered exempt?

Some highly compensated employees were also considered exempt under the prior rule based not on the “duties” test but, as a threshold determination, if they were compensated at a level of $100,000 or more annually.  This threshold has also been significantly raised as of December 1, 2016 to a level of $134,004 annually.  If you have employees who might not be exempt under the traditional “duties” test (a test which will not change in this round of revisions) and they earn less than the new threshold amount, you need to take another look at their classification. This might happen, for example, with certain IT employees who are highly compensated but do not otherwise meet the duties test. Consider what would be required in overtime payments for a misclassified employee who currently earns $100,000 annually at an hourly rate of approximately $48 per hour and an overtime rate of $72. On-call time and “waiting to be called” time might also increase the pay liability significantly if the employee needed to be reclassified as non-exempt.

3. Do you have employees who telecommute?

It is more likely that your employees who are offered the perk of telecommuting as part of their jobs are classified as exempt.  When an exempt employee is permitted to telecommute, the FLSA doesn’t require that their exact hours are tracked in order for their wages to be calculated correctly. What happens under the new rule when those employees make less than $47,476?  Very simply – either the employees’ salaries must be adjusted to bring them in line with the threshold or, there must be an accurate and verifiable process put into place to record and pay for all hours worked.  If a non-exempt employee is working from an off-site location, they may have a tendency to underreport hours worked (whether to conform to a “no-overtime” policy or just because they are not accurate with their records).  Beware – disgruntled employees may later bring claims that they were required or “suffered” (as the law describes it) to work off the clock for the benefit of the employer. Without verifiable recording policies and training in place, this can lead to a major FLSA lawsuit for back payment of wages, up to triple damages and possibly certification of a class of employees going back 3 years who also claim damages.  Carefully consider the implications of allowing off-site work for non-exempt employees.

4. Do you offer different benefit packages for exempt and non-exempt employees?

As you consider how to deal with the inevitable budgetary implications of the new overtime rules, you must also consider the benefits packages offered to your employees.  Perhaps you offer different vacation day awards or PTO accruals for exempt and non-exempt employees.  The implications of altering salaries either upwards, to retain the exemption for the employee, or lowering the base, to take into account the time and one-half compensation for those employees working over 40 hour per week, are more wide ranging than just the pay package alone.  Perhaps you only offer paid group life insurance or long-term disability benefits to salaried (exempt) employees.  Beware of simply “grandfathering” the newly minted exempt employees into these insured plans– it is the wording of the plans themselves that will control what can occur.  Also, industry groups are predicting that higher overtime costs could make it more likely that dental, vision and disability coverage are turned into employee-paid voluntary benefits.  Consider the entire benefit package offered to your employees when determining how to best classify those employees after December 1.

5. Will there be an effect on morale if employees are re-classified as non-exempt, hourly workers?

When considering whether to increase pay or reclassify employees, you should consider the impact a reclassification may have on workers who are now “salaried”. Although the term “salaries” can mean exempt or non-exempt, most employees see a distinction between being a “salaried/exempt” employee as opposed to an “hourly” employee. Because of the need to accurately document and verify the hours of non-exempt (“hourly”) workers, employees may resent being reclassified and required suddenly to keep timesheets or “punch the clock”.  Although one of the reasons given by the DOL for the new rules was to increase pay for middle income workers who would not meet the “duties” test for overtime exemption, (consider for example “night managers” at 24 hour convenience stores who may just be functioning as the sole employee in the store but who, because of title and salary level, were classified as exempt) increases in pay may be illusory for many.  Any potential for an increase in pay may in reality be offset by more micromanagement of “off the clock” work and an increased emphasis on efficiency and maintaining performance standards within a shorter block of time in order to avoid paying overtime rates. Younger generation workers increasingly cite “flexibility” in work schedule as a determining issue for job selection.  Flexibility may suffer if employers are forced to make changes to meet their payroll budgets.  There is a distinct possibility that more part-time/ no benefit workers will be hired to meet the employer’s changing requirements.  Only time will tell.

One thing is certain, the DOL’s new overtime requirements go into effect on December 1 and employers need to be ready with a plan to meet these new challenges.  If you need help navigating the complex wage and hour requirements or if you have not had a review of your job duties and employee classifications in the last couple of years and want to be sure that your policies and procedures would pass an audit, give us a call and we can work with you to make sure your workplace is compliant.

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