Changes in Overtime Regulations to Expand Eligibility – the Impact on Your Business
The change in overtime eligibility will impact an estimated 4.1 million businesses – small and large across the United States. The minimum wage increase will have varying impact as the amount and timing of increases will vary across the country and some businesses who have a higher number of minimum wage workers will have more significant impacts than other companies. In the long run, every business will be impacted directly or indirectly by these changes. Your business will either be raising wages and rebalancing the workforce or you will be paying higher prices for goods and services. These two changes make the case for every business to invest in developing a strategic plan for compliance, staffing, and transforming their businesses as these and other regulatory and economic changes influence how business is done.
Three Key Questions
In this hour I want to lay out the elements that answer three questions:
- What has changed with overtime?
- What will be the impact of minimum wage changes?
- How can businesses act strategically to minimize the financial and operational impact on their businesses?
FLSA Are You Compliant with the Current Rules?
Another key question that needs to be asked is are you compliant with today’s rules and standards. I have worked with many businesses over the years that are surprised to find that they were not complying with FLSA for overtime eligibility. Even large companies have made major mistakes with FLSA compliance.
Companies, their CEO’s and owners have faced fines, penalties and even jail time for deliberate violations of overtime rules – failure to pay overtime due. Your business may not be deliberately in violation, simply non-compliant because you have misunderstood or didn’t know the rules and requirements. However, the Department of Labor is unlikely to take ignorance of the law as a defense because we are expected to know. Failure to comply puts you and your business at risk.
The New Rule
The new overtime eligibility rule was issued in May of this year with an effective date of December 1, 2016. So gaining an understanding of your current requirements, determining if you are currently in compliance is our starting point. There is a PDF of an example Excel spreadsheet on analyzing alternatives for OT changes.
Fair Labor Standards Act
Overtime and minimum wage rules were established in 1938 with The Fair Labor Standards Act – usually referred to as FLSA. This act applies to standards that impact the workforce in all industries. The standards are related to minimum wage, child labor, discrimination, and overtime. FLSA established three tests for overtime eligibility: Salary basis, salary level and job duties.
So first of all who is impacted in your organization. Before I go into this, let me say that many organizations may think they have been complying with the current overtime eligibility rules, because they pay a salary that is above the amount indicated, but remember OT eligibility has a three part test. So determining if someone is exempt (not eligible) for overtime or non-exempt (eligible) is not about whether or not you pay the employee a salary. It is about their role (duties), salary base and salary level.
I want to get into the details on this. FLSA states that overtime pay of 1 ½ times normal pay rates is payable for any ours worked in excess of 40 per workweek.
Now some categories of white collar workers are automatically excluded or exempt from OT. These workers exemptions are found in Section 13(a)(1) of the act.
There are no exemptions for manual labor, skilled trades like plumbers, police officers, etc.
Three Part Rules Test – Exempt IF Employee Meets All Three
To be exempt the employee must meet all three requirements for the employer to apply the exemption.
Salary Basis Test simply requires that an employee be receiving compensation in the form of salary paid in predetermined fixed amounts.
Salary Level Test requires the employee to be paid more than a specified level (currently $455 per week) or $23,660 annual salary. This currently is less than half of average weekly wage rate of salaried workers ($59,592 annually) and is less than double the poverty level for a single person ($11,880) or a family of four ($24,300). These numbers provide the context for why the salary level is changing and how it will continue to change and by what amount every three years.
The third test is the Duties Test requires the employee to perform primarily executive, administrative, or professional (EAP) duties. This is not about job titles, but the actual work performed by the employee.
- An employee’s specific activities govern whether or not this test is met.
- An employee’s primary job function involves managing the entity or a
- department/division within it.
- The employee must regularly have at least two other full-time employees as direct reports and have the authority to hire or terminate staff.
- Administrative duties include performing office or non-manual work related to the management or general business operations of the employer or the employer’s customers and the employee exercises “discretion and independent judgment” in carrying out important decisions.
- Administrative work must relate directly to the running of a business, and does not include working on a production line or selling goods at a retail store.
Here are a few of categories of work that this includes: finance, accounting, quality control, procurement, marketing, human resources, database administration, compliance, computer related and others.
In general, the professional exemption can be used for learned or creative professionals. The test is then based on whether the employee’s work requires either advanced intellectual knowledge or originality, respectively.
It is worth noting that teachers and physicians, including medical residents, are categorically exempt from FLSA’s overtime payment requirements.
Overtime and Minimum Wage in FLSA
Again today I am focused on about two of the areas covered by FLSA – overtime and minimum wage.
First let’s talk about the change that is in effect – overtime eligibility.
So the changes made in May retain most of the original FLSA language, except when it come to overtime eligibility.
The Key Change to the Rule – Eligibility
The major change revolves around the salary level changing from the current level of $455 per week or $23,660 annually to $913 per week or $47,476 annually.
So the salary level is one aspect of the changes. The rule does allow the employer to pay up to 10 % of the salary level through bonuses, incentives, and commission payments. But regardless of the method of payment, overtime will need to be paid to all eligible employees.
There is also a provision for automatic updates of the salary standard every three years. So every business or organization needs to assess their employee salary levels, job duties, and salary basis in the next few months to address potentially impacted employees by December 1st.
Businesses also need to put in place a system and processes for monitoring compensation levels and strategically addressing the rising cost of labor from overtime and minimum wage increases.
Walking through the Changes
Today I want to focus on how to assess the impact on your business. I want to walk you through the strategic, financial and operational decisions you are facing.
So the three part test remains in place, with an increase in the minimum annual salary increasing to $47,476 annually.
Anyone who does not meet the minimum salary level will be eligible for overtime regardless of their job duties. (except those explicitly exempt).
So what does this mean for your organization Let’s talk about the steps you can take to determine if you will be impacted. The analysis you will want to undertake begins with determining who in your organization does not meet the three-part test – salary base, duties, and salary level. Once you have that list, you will want to consider what happens under various scenarios.
- change nothing – continue at the same levels and staff works under same conditions – same number of hours, job duties, etc. pay the 1 ½ x overtime wage.
- increase the salaries of impacted individuals to minimum standard salary and analyze for ripple effects – what other salaries will need to be increased.
- reduce the hours worked by employees; maintain current compensation and duties; add additional employees as needed for workload; monitor increase in or level of employees to identify triggering of other regulation requirements (Obamacare, FMLA, etc.)
- identify other staffing alternatives.