It’s Not You, It’s the Government: What to do about the new FLSA Exempt/Nonexempt Overtime Final Rule
By Amy Smith, MBA, PHR, SHRM-CP
The Department of Labor (DOL) really did have employees’ best interest in mind when they set out to ensure every worker is compensated fairly for their hard work. However, the “Final Rule” released in May is forcing some employers to make some difficult decisions and brush up on their algebra skills.
What part of the Fair Labor Standards Act (FLSA) is changing on December 1, 2016? Part 1, but not Part 2 or 3
- Salary level threshold (1 of 3 tests) to be considered exempt has been raised to $913 per week or $47,476 annually. This is the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South).
- The DOL has established a mechanism for automatically updating the salary and compensation levels every three years. The first increase will take place January 1, 2020, and it is predicted to be around $51,000.
- Allows for up to 10% of compensation to come from nondiscretionary bonuses, incentive payments, and commissions as long as these payments are paid on a quarterly or more frequent basis.
- Sets the total annual compensation requirements for highly compensated employees at $134,004 (90th percentile of full-time salaried workers nationally)
For an employee to be exempt from earning overtime, they must now be paid $913 per week or $47,476 annually. They must also continue to meet the duties test for the overtime exemption AND be paid on a salary basis. Additionally exempt does not mean salary! Exempt means exempt from the FLSA protection, earning overtime, and tracking hours. Non-exempt means you are protected by the FLSA, do earn overtime, and must track hours.
All three parts must be met in order to be considered exempt from earning overtime. If you do not pay an employee enough to meet the first qualifier, then YOU MUST PAY THEM OVERTIME. It does NOT matter if they meet the job duties test and are paid on a salary basis.
You may still continue to pay an employee on a salary basis, but if they make less than $913 per week, you must track their hours and then pay overtime for time worked over 40 hours per week.
If you are trying to get out of it, research (and get backup) to see if you are even “covered by the FLSA”. Enterprise and Individual FLSA Coverage Fact Sheet Chances are that you probably do need to comply with the FLSA. But what if I don’t want to? If you accidently violate the FLSA, you may have to pay back wages for up to 3 years to correct that mistake in addition to a possible penalty.
Employer Action Items:
- Find out how many hours your employees are actually working!
- Update policies to comply with FLSA changes: Time keeping and recording, off the clock work (i.e. checking e-mails at home), Travel Time, Meal and Rest Breaks. Ensuring policies and practices are up to date and in compliance will aid in protecting you against a DOL audit if it ever happens!
- Train your Supervisors and Managers to monitor time to prevent surprise overtime expenses and to help change old habits
- Review Job Descriptions to make sure they still reflect the skills necessary to perform the job or meet the duties test.
- COMMUNICATION! The adult learning theory emphasizes explaining why it’s happening: It’s not you, it’s the government. Framing any change in the right light will be important so employees do not interpret it as a negative, or that they are being penalized.
- Develop and refine your game plan now! Seek outside help if needed!
- To pay, or not to pay overtime? Calculate it out to see how to win.
- Increase current exempt salary to $47,476
- No change in pay, and pay OT
- No change in pay, but limit overtime, and hire PT
- Take advantage of local school coops
- Convert salary down and pay OT so total compensation essentially stays the same
- Convert to non-exempt and pay on a salary basis
Pay attention to the salary level changes and determine your game plan, but keep in mind employee morale! We recommend consulting with a professional to confirm or make your game plan so you are prepared come December 1, 2016.