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The Overtime Rule Gets an Overhaul: Are You Ready?

Now is the time for employers to prepare for imminent changes.

To reduce the risk of non-compliance, businesses should prepare now for the upcoming overtime rule changes that primarily impact white-collar employees.

The U.S. Department of Labor’s (DOL) revisions to the Fair Labor Standards Act (FLSA) white-collar exemption are expected to be finalized soon. The proposed new rules would raise the salary threshold from $455 per week ($23,660 per year) to $679 per week ($35,308 per year), allow employers to include “certain nondiscretionary bonuses and incentive payments” up to 10% of the new $679 per week salary threshold and, raise the total annual compensation requirements for highly compensated employees to $147,414.

There is quite a bit of confusion over these updated rules. First, let’s cover what the rules do not impact.

The rules, when finalized, are not expected to:

  • Change the primary duty (defined by the DOL as the principal, main, major or most important duty that the employee performs) test for exemption from the rules
  • Revise the duties tests required of executive, administrative or professional employees
  • Amend the salary basis test
  • Apply any new compensation standards to outside sales employees
  • Alter the computer professional exemption to the overtime rule, which is generally applicable to analysts, programmers, engineers and those with similar skills. Workers should be highly skilled in theoretical and practical application of highly specialized knowledge with computer systems.

How to Prepare

The cost of non-compliance is significant when considering penalties, legal fees and reputation. Organizations should create an action plan to determine the impact, including:

  • Review all job descriptions to make sure they reflect the duties performed and the skills necessary. This step is essential to determine necessary adjustments and whether other exemptions are met. The written changes must be truthful in case they are ever challenged by an external party. 
  • Review overtime pay practices for existing non-exempt employees ensuring proper calculation of current pay.
  • Conduct a market study of wage rates to determine overall competitiveness of pay (this data will also be useful in creating solutions).
  • Review currently classified exempt employees who will fail the new salary tests as well as the highly compensated employees (HCEs) who fall below the proposed level. Currently, HCEs are employees who must: (1) have a total annual compensation of at least the current regulation threshold; (2) customarily and regularly perform one or more of the duties of an executive, administrative, or professional exempt employee (3) earn not less than the current regulation threshold per week (4) be compensated on a salary or fee basis and, (5) have a primary duty that includes performing office or non-manual work.
  • Create a list of employees who are currently classified as exempt and earn a base pay slightly above the current threshold. Then:
    • Estimate or determine overtime.
    • Review incentives or other bonuses paid.
    • Determine the needed pay amounts to meet above tests to maintain the exemption to be used as part of an alternate strategy.
  • Determine affected employees who will be reclassified as non-exempt and develop appropriate strategies.
  • Review the results from above and assess whether to convert each affected position to non-exempt, raise the salary level and/or engage in restructuring to achieve the new salary requirement.
  • Determine how operations would be impacted by reclassification and/or salary increases, including how those changes would then impact other employees (in addition to those directly impacted).
  • Prior to making any formal changes to compensation, consider the impact of pay equality both internally (comparison of pay within a company) and externally (comparison of pay between an employee and those out the company).
  • Estimate lead time required to implement any changes to payroll and timekeeping systems.
  • Outline how to train new non-exempt employees on timekeeping matters.
  • Draft an internal communication plan.

If the proposed rules result in an increase in compensation, employers may have to manage how to handle or offset the anticipated cost of paying overtime (or its equivalent). Here are some things to consider:

  • Benefit adjustments. Higher overtime costs may have employers looking at cutting ancillary benefits such as dental, vision and disability coverage from company-provided to voluntary benefits.
  • Benefit costs. When determining adjusted salary increases, employers need to consider the increase in salary-related benefit costs, including life insurance and any contributions to 401(k) or other retirement plan.
  • Impact on paid time off (PTO). Benefit offerings that can be higher for salaried workers include the number of vacation days and/or PTO. The cost of PTO may increase because of compensation adjustments.
  • Salary/wage adjustments. Increasing employee pay to retain exempt status can be costly and lead to pay compression throughout the salary structure. This will impact salary adjustments above those directly affected by the new FLSA. Similarly, as overtime pay is part of overall compensation budgets, employers may need to lower hourly rates for reclassified employees if they will be paid for overtime work. Though employees may see this as a demotion, employers need to communicate that the salary range for an employees’ position does not meet the federal threshold to remain exempt, emphasizing that the employee will continue to be a salaried employee who is now eligible for overtime pay.

Companies should adopt or continue to follow a total compensation approach to remain an employer of choice. Internal communication plans must be created to share intentions and strategies. Transparent communication is vital to the overall success of the adopted changes.

Elliot Dinkin is president and CEO of Cowden Associates, Inc. a Pittsburgh-based company specializing in helping corporate clients find the best solutions for compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting. Dinkin has been in the actuarial, compensation and employee benefits field for more than 35 years.

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