What should we do now to prepare for the new overtime rule change?

May 25, 2016

On May 18, 2016 the DOL announced a final rule updating white collar exemption qualification requirements. Employers are required to comply with the final rule on December 1, 2016.

  • The salary level for administrative, executive and professional employee exemptions will increase to $47,476
  • The salary level for the highly compensated employee exemption will increase to $134,004
  • The final rule does not change duties test for white collar exemptions

188 days until December 1, 2016. Don't panic, but start planning.

Financial Preparations

Analyze the salaries of employees who may be affected by the final rule and start forecasting for increased salaries and overtime costs. Suggestions include:

  1. Determine which employees are exempt at an annual pay rate of less than $47,476, including up to 10 percent of non-discretionary bonuses.
  2. Consider whether to raise these employees’ pay to meet the new threshold of $47,476 to maintain exempt status or budget for potential additional overtime expenses with the reclassification to nonexempt status.
  3. Review with your managers or exempt staff the average hours that each employee in the above group works beyond 40 hours per week, or other state hours worked requirement triggering overtime eligibility. Don’t forget to include meal and rest periods, travel time, training time, and other hidden overtime in that analysis.
  4. Calculate the average number of overtime hours of your current nonexempt workers on an annual basis.
  5. Based on these two numbers (from steps 2 and 3 above), determine the average number of hours that would be considered as overtime (over 40 hours in a workweek, or eight hours in a day for some states) for the exempt workers; the aggregate of both is an estimated average of overtime hours that the exempt worker may work if reclassified as nonexempt.
  6. To calculate the overtime budget, take the average hourly rate of all exempt workers at the annual rate of less than $47,476, multiply the hourly rate by 1.5, and multiply that number by the estimated average overtime hours calculated in the last step to determine the proposed overtime budget for the current exempt workers that may be reclassified as nonexempt.
  7. Consider requiring exempt employees earning less than $47,476 per year to start tracking their weekly hours worked. Since exempt employees do not typically record their work hours, it may be difficult for them to accurately estimate the overtime hours they have worked and anticipate working in the future. Having them track their work hours will provide the employer with valuable information when it comes to budgeting.

Benefits Preparations

Review your group benefits plans and your paid time off and leave policies (for example, sick and vacation) and assess how each may be impacted as they pertain to eligibility and accrual differences for exempt and nonexempt workers and how the company will best manage the transition from one accrual method to another. For example, if an exempt worker accrues based on weeks worked up to three weeks of paid time off (PTO) a year, but a nonexempt worker will only accrue for hours worked up to two weeks of PTO a year, the company may experience frustrated workers and face retention concerns due to a loss in benefits under the leave policy.

Communications Preparations

Plan your communications strategy carefully. This is a great opportunity to talk with your employees about your pay strategy and what your organization values, and you can reinforce that the regulatory definitions of overtime exemption status are not important to your evaluation of each employee’s worth to your organization.

Keep in mind that many exempt employees view earning a salary as a rite of passage — a declaration of their professional status. Notifying an individual that he or she will now be required to “punch a time clock” will require some forethought and finesse to ensure that the message is not interpreted as a demotion or as a loss of status. The employee’s perception of this change in classification will be amplified if these employees are no longer able to work the longer hours that had allowed them to feel a part of significant business contributions.

You may also have to consider whether you need to make any structural changes in your organization to reflect having exempt and nonexempt employees with similar job titles and duties or amend policies that once applied only to exempt supervisory positions. How you communicate those changes will set the tone for discussions regarding organizational goals and objectives and each employee’s contribution to those goals.

Address the perception that nonexempt status leads to a loss of flexibility in scheduling. You may still be able to offer the same flexibility for work schedules as you have in the past, but employees will need to account for the time that they are working and not working during the regular work day, which is the change that may require the most adaptation. Review your policies to determine the level of schedule flexibility that may be permitted for nonexempt staff. In many organizations, exempt employees have the flexibility of coming in and leaving as they choose, as long as their work gets done. However, for those who will become nonexempt, the hours in which the employee is not working is unpaid time. How they manage their time will become more structured, and you should communicate your expectations regarding flexibility, accountability, accurate time recording, and business requirements to your employees.

Don’t forget about your remote workers and occasional telecommuters! A change from exempt to nonexempt status may also impact those who work from home. Determine whether telecommuting is feasible for your nonexempt employees, and make sure you include an evaluation of measuring time and productivity, as well as ensuring meal and rest breaks are taken appropriately for those employees in states that have defined meal and rest break rules. Communications should include the rules for working overtime, the requirement to take an uninterrupted meal break as mandated by state law, the ability to work flexible hours from home, and method for validating hours worked each pay cycle.

Make your Communications Personal

How the changes in classification status and rates of pay are communicated to employees will have a lot to do with your company culture, pay philosophy, and style of communication. Face-to-face communication is generally ideal method when discussing compensation. Follow up with written documentation confirming your discussion with each impacted employee that shows the new classification status, rate of pay, and the overtime rate of pay that will apply. Some states already require employers to notify nonexempt employees in writing any time a change in rate of pay occurs, including California, District of Columbia, New York, and Pennsylvania.

Most importantly, make sure that you train your management team about the changes you are making, including not just the “what,” “how,” and “when,” but also the “why” so that the company’s intentions are communicated in a way that demonstrates thoughtful consideration of the alternatives, respect for your employees, and alignment with your company’s culture and strategic objectives.

Start now, consider your options carefully, and put your plans together and you’ll be ready to comply with the new FLSA rules by December 1st!

Adapted in part from ThinkHR