In May, the U.S. Department of Labor (DOL) issued new regulations and revisions the nation’s overtime rules. Labor experts estimate this new ruling will expand overtime eligibility to more than 4.2 million exempt workers in America and the chance that the new rules will impact your business are very high.
A Quick Summary of the Changes. The new rules become effective December 1, 2016 and require overtime pay after a 40-hour work week for salaried, exempt employees earning up to $47,476 per year, or $913 a week, more than double current maximums of $23,660, or $455 per week. Employers will need to track hours worked on all impacted employees to substantiate overtime claims. No changes were made to the overtime rules for hourly workers.
The new rules provide “white collar” exemptions for certain professional, administrative, executive, computer, and outside sales workers. To qualify for exemption, the following three tests must be met:
- The employee must be paid on a salary basis not subject to quality or quantity of work
- The employee’s salary must meet a minimum salary level ($913 weekly/$47,476 annually)
- The employee’s primary job duty must meet the “standard duties test” for the type of work that is professional, administrative, or executive in nature
Additionally, the final rule ensures the salary threshold is automatically updated every three years, starting January 1, 2020 according to the “40th percentile of earnings of full time salaried workers in the lowest wage Census Region” (currently the Southern United States).
Employers should begin evaluating the impact of the new rules well before the December 1st effective date. Provided below are four steps to evaluate the impact and begin implementing the necessary procedures and policies to comply with these changes.
4 Steps to Prepare for Overtime Expansion
Step 1: Examine Your Workforce
Start by analyzing your company’s needs from a labor perspective by asking yourself the following six questions:
- How many exempt employees currently earn $913 per week ($47,476 per year) or less?
- Do those employees pass the “standard duties” test for exempt employees?
- Do these employees work overtime? If so, how much and how often?
- How much will my overall overtime increase under the new ruling?
- Will these costs be nominal or significant?
- How will the new ruling impact my work processes?
With regulations such as this considerably increasing your administrative responsibilities, you may want to consider outsourced accounting and human capital solutions to streamline the compliance process.
The tables below provide guidance in computing employee compensation and the total potential additional employer compensation cost for impacted employees. For example, if you employ a salaried, exempt employee currently earning $35,000 per year who usually works 300 hours of overtime (approximately 15% of the total straight-time hours in a year), his compensation will increase to $42,572 under the new rules and the total annual cost of this employee with the employer’s share of payroll taxes will increase $8,151.
Total Compensation to Employee Post 12/1/16
Additional Compensation Cost to Employer with Payroll Taxes Post 12/1/16
The highlighted amounts in the table represent salaries that might need to be increased if certain levels of overtime hours are expected. This will prevent pay discrepancies between employees with base salaries below the new threshold of $47,724 but who earn significant overtime pay and those whose salaries are above the threshold but also work significant overtime.
Step 2: Leverage the Data to Determine a Plan of Action
The data gathered from Step 1 will help you establish a roadmap for managing costs under the new rule. This may include deciding to raise salaries, transitioning potentially nonexempt employees to hourly wages, or deploying a combination of the above plus additional restructuring tactics to streamline your workforce and limit your liability. Additionally, you will need to determine the best method for tracking hours for nonexempt employees that meet the new requirements.
Step 3: Update Technology, Policies and Procedures, and Job Descriptions to Ensure Compliance
After formulating a plan of action in Step 2, you will want to ensure you have the tools, technology, and support in place to implement these changes. Key points may include investing in new technology to track hours worked, a robust policy regarding overtime rules, defining permissible off-duty work versus on-duty work, categorizing exempt versus nonexempt jobs, and so on. Make any necessary changes to policies and job descriptions so that you are ready to “go live” when the new ruling takes effect.
Step 4: Communicate. Communicate. Communicate.
Honesty and transparency are always the best policies when it comes to communicating change to your people. Building an effective communication strategy ensures you are conveying everything you need to from a compliance perspective while also promoting buy-in and gaining acceptance from your workforce.
In this final step, the goal is to help employees understand the “why” for the change, the drivers for the change, and the implications both as employees of the company and as individuals. Be sure to include all pertinent changes from Step 3 in your communication strategy including new technology, amended policies and procedures, modified job descriptions, and restructuring of pay. It is important for employees to understand that restructured pay or a change in job duties do not mean a demotion, but rather a change in the way their work is monitored and paid. Anticipate the questions your workers will have and empower your management team with tools and talking points to assure employees this change is not only necessary, but for the best given the new regulations.
This guidance is provided to help employers understand their responsibilities and options for complying with the Fair Labor Standards Act’s overtime provisions following publication of the final rule. The ruling will have a large impact on companies nationwide. To prepare now, employers can take action by tracking overtime for employees making less than $913 per week ($47,476 annually) and leveraging that data to formulate a workforce reorganization plan that makes the most financial sense for their businesses and their people.