As of December 1, 2016, the changes to the Fair Labor Standards Act (FLSA) overtime exemptions will go into effect. The main change facing employers is the salary level required for an employee to be considered exempt. Previously, the minimum salary required to meet the exemption requirements for most white-collar exemptions was $455 per week. This amount was not tied to any benchmark and had not changed in years. Starting December 1, this amount changes to $913 per week to qualify for most exemptions. This new amount represents the 40th percentile of full-time salaried workers in the lowest-paid census region and will be adjusted every 3 years to continue to stay at that percentile.
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With the FLSA changes going into effect soon, employers are making their final preparations to be in compliance with the new salary levels for exempt employees. Let’s take a look at some tips.
Tips for Employers Making Changes Ahead of the New Overtime Rule
- First, determine which route you will take to stay in compliance.
- Assess how much it would cost to retain all currently exempt employees as exempt by increasing salaries as needed to at or above the new threshold.
- Assess how much it would cost to instead keep salaries as they are, but pay overtime to employees so they can continue to work the same hours they currently work. This option means these employees will now be nonexempt. Determine whether it may be possible to have employees work fewer hours to reduce overtime pay with this option. (Don’t forget to account for additional administrative costs of tracking overtime if taking this option).
- Assess whether there is an option to adjust salaries downward while adding overtime to keep employees essentially at status quo in terms of total pay and total hours worked. (Be aware, however, that this may feel like a penalty to employees, even if the net pay is the same. There could be negative repercussions for the employer in terms of employee morale and turnover.)
- Another option would be leave employee salaries as they are (thus, making anyone under the new threshold now nonexempt), and then hire additional employees to cover the remaining workload rather than paying overtime to current employees. This still gets work done, paid at base rate rather than overtime rate.
- For all these options, it’s important to have a good idea how many real hours employees are working. If you don’t already have this information, you may need to conduct some research. Without accurate data, the assessments may be completely off.
- Once you have determined which route you will take, figure out which departments and systems will need to be updated in order to make the transition. For example, you may need to coordinate payroll, accounting, and HR. If there are systems that pull in any type of salary data, they may need to be updated accordingly. Be sure to talk with your IT department if you’re unsure of what systems may be affected.
- Consider how you will communicate the changes to employees. While this is a legal compliance issue, it still needs to be managed for employees to understand and not feel penalized by this change—even if the change is in their benefit. Depending on which avenue the employer chooses, the communication to employees will differ. In particular, if employees are now required to track hours worked when they have not done so in the past, this will need to be managed so that employees do not feel this change is evidence of lack of trust. Any changes to salary and/or hours worked can be tense, even if the employee’s total pay is not changing. Remember that this change may also mean process changes for employees, and thus, training may be required.
- No matter which method you choose to get employee salaries into compliance with the December 1 changes, remember that the new threshold number is now benchmarked and will likely change every 3 years. If there are ways to make the process of changing employee salaries more efficient in the future, consider that now.
- Pay attention to how your payroll schedule fits with the December 1 deadline. It may make sense to implement the changes early to give time to make any adjustments as needed.
- Look at what policies may need to be updated, such as expected hours of work and time-tracking procedures. New overtime policies may be required. Disciplinary policies may need to be updated to note that disciplinary procedures may be required for not following approval and/or overtime policies.
What else is your organization doing to prepare for this change? What percentage of your workforce is affected?
*This article does not constitute legal advice. Always consult legal counsel with specific questions.