Update May 18, 2016: The new overtime rule was announced today and takes effect December 1. The threshold is $47,476 and will be updated every three years. Incentive pay like bonuses can account for up to 10% of the threshold amount.
Update November 23, 2016: A preliminary injunction issued by a federal judge has delayed the new FLSA overtime rule that was set to take effect December 1. With the delay in the rule, employers are not required to meet the rule's increased salary threshold of $47,476 for exempt status starting December 1. The rule will continue to be reviewed by the court and a final decision will be issued at a later date.
On March 14, 2014, President Barack Obama signed a memorandum, directing the U.S. Department of Labor to revise the Fair Labor Standards Act overtime protection rules. The DOL subsequently issued a proposed rule that would raise the annual salary for the overtime exemption from $23,660 to $50,440. The final rule is expected within days and the general consensus is that employers should start preparing for the change now as they may have 60 days to comply.
Getting ready for change is no small matter – it requires sound knowledge of the proposed regulation and the creation of effective strategies to ensure a smooth transition. To help employers through this challenging time, we will examine the proposed rule and offer expert advice on how to deal with the change.
The FLSA Presently
Currently, salaried executive, administrative and professional employees who meet the DOL’s standards for exempt status must receive no less than $23,660 a year. Under the FLSA, these employees are not eligible for overtime. Nonexempt employees, whether salaried or hourly, qualify for overtime. The current salary threshold of $23,660 was last updated in 2004.
If adopted, the proposed overtime rule would:
- Increase the annual salary threshold for exempt-salaried employees to the 40th percentile of weekly earnings for full-time salaried workers, which is estimated to be $50,440 for 2016.
- Raise the annual salary threshold for exempt highly compensated employees from $100,000 to $122,148.
- Tie the annual salary threshold to an automatic escalator so that the rates can increase automatically with inflation.
The change is predicted to affect nearly 5 million white collar workers. Note that raising employees’ salaries to the threshold doesn’t necessarily mean they’re exempt from overtime pay. The employee must also perform specific duties, as defined by the FLSA, to qualify as exempt. No changes were proposed for the FLSA job duties test.
Reason for the Change
The DOL states that President Obama’s goal is to ensure workers receive a “fair day’s pay for a fair day’s work.” In addition, the FLSA overtime exemption for executive, administrative and professional employees was initially intended for highly compensated employees, not for workers earning as little as $23,600. Many exempt employees making $23,600 happen to work more than 40 hours per week, but don’t receive overtime. The proposed rule seeks to increase compensation for these workers by requiring:
- Higher pay for exempt-salaried executive, administrative and professional employees.
- Overtime for any employee earning less than $50,440 per year.
Most Vulnerable Sectors
If the proposed rule takes effect, it will impact most businesses. Sectors that tend to pay lower salaries will be most affected, however – such as nonprofit, hospitality and retail.
“Assistant managers in a restaurant open 24/7 are not going to pass the exemption test either on salary or in job duties,” says Ed Adams, Executive Consultant of EBS Consulting, an HR management consulting firm serving nonprofits, fast food chains and other organizations. “The job duties can’t change,” he said. “Their assistant manager at night has to be in a management role and also flip burgers from time to time. They’re not about to pay that person $50,440 a year.”
Employers are in a clear dilemma, and preparing for change will require strategic action.
Adjusting to Change – High-Impact Sectors
High-impact sectors will need to handle the change based on their specific needs. “Fast food restaurants are going to have to hold employees at 40 hours, readjust their schedules, maybe hire a few part-time people, but they’re not going to be raising salaries,” Adams predicted. “They can’t afford it. They make a product that sells for a few dollars and it’s not worth $50,440 to have an assistant manager in that category, and time and a half is just impossible as well.”
While fast food restaurants are looking at the change from a scheduling perspective, nonprofits are viewing it from a reduction-in-services perspective. “Nonprofits can’t automatically increase their budgets,” said Adams. “They’re living on tax dollars, voluntary contributions from individuals, endowments, or interest on endowments. They’re a different game altogether.”
General Preparation Strategies
When asked how employers in general can prepare for the change, Adams suggested two main areas of focus: flexible work schedules and reengineering the workplace.
Flexible Work Schedules
Employers will increasingly need to look for more part-time help to cover the extra hours that their exempt-salaried employees used to work. Flexible work schedules allow employers to leverage the untapped workforce, which includes:
- Early retirees seeking something productive to do, and that particularly applies in the nonprofit world. “The most dependable people I see in my client base are seniors,” Adams explained. “They’re over 55 and a lot of them have the experience, training and work ethics that employers are looking for.”
- Younger people, including college students. “There’s a huge volume of those folks working part-time to supplement their college tuition and so forth,” said Adams.
Reengineering the Workplace
Employers will need to reexamine current job descriptions and make modifications where necessary. Adams recommends the following approach:
- Review the current salaries of white-collar exempt employees and compare them to the proposed salary threshold. This allows you to focus on specific categories, instead of reviewing everyone en masse.
- Determine which salaries you can raise to retain exempt status – such as those on the cusp of the threshold – and those you can’t raise.
- For salaries that you can’t raise, look at flexibility, work schedules and work hours. Then decide whether you need to bring in part-time help.
Potential Impact on Employees
The change may affect employees in both positive and negative ways.
On the plus side:
- Exempt-salaried workers must receive at least $50,440 a year, which could mean a salary boost for those earning less.
- Employees reclassified as nonexempt may get to work overtime, which would increase their overall pay.
On the downside:
- Reclassified employees will need to adjust to clocking in and out; punching a time clock can be perceived as a function of a lower rung of the corporate hierarchy.
- Exempt-salaried employees whose hours have been cut to 40 may need to deal with their employer bringing in part-time help so the company doesn’t have to pay overtime.
- Employees with reduced hours may feel the need to complete the same amount of work, in less time, causing stress.
- It could be difficult for nonprofit employees who enjoy putting in extra hours for the cause to adapt to fewer hours. Adams noted, “People don’t usually go into the nonprofit world because they want to make a lot of money. They tend to have a heart connection with that organization; some compelling reason through their history or family history that makes them want to be of help.”
- It's possible some employers may reduce an employee's overall base pay to accommodate overtime pay.
Communicating the Change
Employees are naturally concerned as to how the change will affect them, and managers will need to encourage honest and open communication. “The company is not the bad guy in this scenario,” said Adams. “I think explaining that employers don’t have any option but to comply is the first thing. Employees need to know where it’s coming from.” Managers should encourage feedback, Adams stated. “Say, ‘here’s our plan, but we’re open to suggestions. Some of you may consider a job schedule change, going from part-time to full-time, or vice versa, just let us know.’ Get their input so they feel like part of the solution.”
Final Rule and Effective Date
The final rule is expected to be published in May and take effect by July 2016. Whether the final rule will reflect any changes to the proposed rule remains to be seen. There are questions around the threshold amount, which could be lower than the original proposed amount. It is also unclear how bonuses figure into the threshold.
Change is coming, and how employers react to it will determine whether they have a successful transition. “Now is the time to start doing an internal analysis, before this rule goes into effect,” Adams advised. If necessary, employers should seek legal or human capital assistance to ensure compliance and a seamless transition.