Increase to the Exempt-Status Wage Threshold

Transcription

1 Increase to the Exempt-Status Wage Threshold New Overtime Rule to Take Effect December 1, 2016 June 2016 Lockton Benefit Group Since 1940, the Department of Labor (DOL) regulations have generally required three tests to be met for the Fair Labor Standards Act (FLSA) exemption to apply: 1 2 The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed. (Salary Basis Test) The amount of salary paid must meet a minimum specified amount. (Salary Level Test) AUTHORS MARY MOSQUEDA Compensation Practice Leader mmosqueda@lockton.com JOE MEYER Senior Compensation Consultant jpmeyer@lockton.com The employee s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations. (Duties Test) These regulations were last updated in 2004, when the DOL set the weekly salary level at $455 ($23,660 annually) and made other changes to the regulations, including collapsing the short- and long-duties tests into a single standard-duties test and introducing a new exemption for highly compensated employees. L O C K T O N C O M P A N I E S

2 Salary Threshold On May 18, 2016, the DOL released the changes to the final overtime rule, which raised the salary threshold at which an employee is eligible to be classified as exempt from $23,660 to $47,476 annually. Any employee currently classified as exempt must start earning a fixed salary of at least $913/week in order to retain his or her exempt status. If the employee does not earn at least this amount, he or she no longer can be classified as exempt and will be entitled to overtime pay beginning December 1, Bonuses/Commissions The DOL rule changes allow up to 10 percent (or $91.30 per week) of earnings used to satisfy the new threshold to come from nondiscretionary bonuses, incentive pay, or commissions, if such payments are paid at least quarterly. Automatic Adjustments The new rule allows the DOL to change the salary threshold amount every three years, beginning January 1, The 40th percentile weekly earnings of full-time salaried workers in the lowest-wage Census region will be used to set the salary threshold in the future. Highly Compensated Employees The Highly Compensated Employee (HCE) threshold has been raised from $100,000 to $134,004. Employees earning at least this amount can generally be considered exempt without regard to the duties test. The DOL will use the 90th percentile of earnings of full-time salaried workers nationally as the threshold for HCE adjustments in the future. 2

3 June 2016 Lockton Benefit Group Duties and Salary Basis Tests The DOL has not made any changes to the existing Duties and Salary Basis Tests. Why Change the Rule? On March 13, 2014, the DOL received a Presidential memorandum urging it to update, modernize, and simplify the current Fair Labor Standards Act rule. The Salary Level Test is supposed to help identify salaried workers who are entitled to overtime. The DOL believes the former salary threshold was outdated. Who Will Be Affected? Some examples of roles that are likely to be affected include: Food service managers/supervisors. Retail sales managers/supervisors. Nonprofit managers/supervisors. Customer service representatives. Legal support workers. Office and administrative support workers. Social workers. Counselors. Higher education employees. How Lockton Can Help The Lockton Compensation Practice can provide an analysis of employees who may be impacted by the FLSA rule changes and make recommendations based on the facts of each employer s situation. The Compensation Practice can perform financial modeling of multiple scenarios to help organizations minimize the financial burden of implementing the proposed changes. Examples include: Calculate a new base pay rate for employees that will keep total annual pay constant or near constant even with new overtime hours/ premium. Ensure new base pay rate complies with national and local wage regulations. Calculate additional headcount needed to avoid paying overtime, including the cost of using temporary workers for overtime at a lower rate. Conduct a comparison of adjusting to the new threshold versus projected overtime expenses. Most organizations will use a combination of some or all of these methods, depending on which mix of solutions best suits their financial and cultural needs. Oftentimes, different approaches will be needed for different roles. If employers need assistance properly classifying employees, the Lockton Compensation Practice can also provide FLSA evaluations and exempt/ nonexempt status recommendations. This step may also include desk or job audits for updating job descriptions. Lockton can also assist with developing communication materials and training sessions for managers. 3

4 Communicating the Change Employers should begin communicating the change well before the deadline to comply with the rule becomes effective on December 1, Employees who will be affected by the change in their exempt status may feel disengaged or demotivated. Employers should be talking with those employees who will be affected as soon as the decisions on how to handle the changes have been made. Lockton s advice is to eliminate the element of surprise and share with employees the details of the FLSA regulations and why it is happening. This will help the employee understand that it is not a reflection of performance. Options for Communicating the Change FAQs Town hall meetings Manager meetings One-page overview Social media/intranet Create an FLSA task force or committee to champion and lead the communication effort Communication Considerations Salaried Versus Hourly: The new rule does not require affected employees to become hourly workers. They can remain salaried; however, work hours must still be tracked, and the employee is due overtime pay for any hours worked over 40 per week. If the salaried basis is important to an employee, then it is probably important to use that method of compensation. Manager Training: Managers will have to clear up confusion about the overtime (OT) hours that reclassified employees can work. One question formerly salaried workers will have is whether they can get all their work done in a 40-hour workweek. Managers should conduct an audit of the job to determine if the job can be completed in a 40-hour workweek and to determine when, and if, OT is necessary. Additionally, Lockton recommends creating FAQs and guidelines for having difficult conversations with employees. 4

5 June 2016 Lockton Benefit Group Relay Flexibility: Often, employees feel that nonexempt means working 8 a.m. to 5 p.m. every day and that they cannot work a minute past 5 p.m. This myth needs to be clarified. Flexibility can still occur. If an employee needs to stay late for a specific task or meeting, then he or she can adjust his or her time on a different day during that week to meet a 40-hour workweek (except in California 1 ). Company Property, Travel, and Working from Home: Decisions around salaried workers who take company phones and laptops home need to be addressed. The organization should determine whether the policy is to leave these items at work if employees are reclassified, or take the property from employees entirely to prevent them from working after hours. In many cases, working from home is an uncontrollable activity for the employer, and tracking the time worked at home as OT could prove problematic. One option is for managers to work with employees to document job descriptions, including what types of work are authorized outside of normal working hours, how much time is authorized, and the necessity of recording all time worked. Managers will also have to consider whether to allow reclassified employees to travel on company business and how to compensate workers for travel time. Other considerations for the organization include responding to s or phone calls from customers or staff outside of normal working hours. There may be a need to shift response time and priorities that could have an impact on productivity. Some of those responsibilities may need to be shifted to exempt employees, and corresponding job descriptions should be updated to reflect those changes. For more information, please contact your Lockton Account Team or the Lockton Compensation Practice. References 1 Final Rule: Overtime Department of Labor. Department of Labor, 17 May Web. 23 May Please see page 25, section 510 as a part of the reference. 5

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