Here's what everyone was preparing for:
The FLSA Final Overtime Rule of 2016 reboots business-as-usual for money, mission, and overtime math. DOL estimates show “4.2 million workers will be directly affected by the rule” effective December 1, 2016, while 8.9 million will have “strengthened protections” due to failing the duties tests.[i]
1. Money: Apply the Salary Basis Test and Salary Level Tests.
The first two tests are the basis of how someone is paid and how much. Often, the salary basis test and salary level tests are applied to all employees prior to applying the duties tests.
How Paid? Apply the Salary Basis test. An employee must be paid on a salary basis, or administrators, professionals, and computer employees can be paid on either a salary basis or an equivalent per hour fee basis. If an employee otherwise meets all of the exemption criteria but is paid in a way that doesn’t meet the salary basis test, consider whether adjusting the basis of pay would be beneficial regarding pay and the likely results on an employee, team, department, and organizational level.[ii]
How Much Money? Under the Final Rule, consider more than base pay when applying the standard salary level test for $913 per week ($47,476 per year) on a salary basis or $27.63 per hour on a fee basis. The amended standard salary level test allows including up to 10% nondiscretionary bonuses and incentive payments (including commissions) when those are paid at least quarterly. Evaluate those payments per quarter. If the nondiscretionary bonus/incentive payments weren’t enough to meet the 10%, then a timely quarterly catch-up payment is allowed.[iii] That 10% calculates as $1,186.90 quarterly at the time the rule goes into effect. For outside sales, teachers, and those practicing law or medicine, skip over the standard salary level test because it doesn’t apply. For educational institutions, there’s a second salary level that can apply to administrative employees: the same salary as a starting teacher would earn.[iv]
For Highly Compensated Employees (HCEs), base salary must meet the standard salary level test, while the annual total compensation must be $134,004 per year, including any nondiscretionary bonuses, incentive payments (including commissions), and any annual catch-up payments.[v] In the unlikely case where a highly compensated employee earns a base salary equaling the standard salary level, the non-discretionary and incentive payments (or annual catch-up) calculates as $86,528 annually under the amounts announced as part of the Final Rule until the end of 2019.
To keep changes required for the FLSA Overtime Final Rule from derailing the business mission and objectives, consider overall strategy in how you apply the technical compliance requirements and people requirements. This starts with getting in front of how employees perceive any requests or increased observation related to primary duties.
Test primary duties with efficiency and employee morale in mind. A primary duties analysis can reverberate across business units with employees who have possible white collar exemptions: executive, administrative, professional (learned/creative), computer related, and outside sales. Each exemption’s separate duties tests could require asking employees and supervisors. While these sets of duties tests remain the same[vi], the nature of work continues to change. Even with overtime in the news, asking about job duties out of the blue can set employees on edge. When auditing job duties, explain why – and be ready to respond to concerns. Consider a job duties audit, analysis tools like SHRM’s more comprehensive FLSA: Exemption Questionnaire, along with involving legal counsel. To take this to the next level of analysis beyond actual duties instead of titles, also consider tech impacts on primary duties and level of control.
Organizational Mission Strategy: Keep the organization’s strategy and mission first. Your organization’s compensation strategies, mission, and objectives, may make the next steps clear. Knowing estimates of the numbers of employees affected and their roles will be key to better if-then analysis. Look for your HCM and payroll systems to enable slice and dice data capabilities and charting to see how salary levels, positions, jobs, and current FLSA exempt or non-exempt status apply in your organization.
How will changes in exempt/non-exempt status and compensation strategies impact the overall organization, its mission, and strategies to achieve that mission? Additional strategies may involve changing who does what, combining, or eliminating positions. If some employees have increases, other salary requests can start to domino.[vii]
After job duties have been analyzed, salary basis and threshold tests applied, and decisions made based on business strategy, evaluate the impact and communicate it. Employees and managers need to know in advance. Tell employees if they will be losing their FLSA exempt status. A change in status can be a paradigm shift in how someone thinks about work and impacts status. Understand that this can tie into a sense of prestige, emotions, trust, engagement, and value.[viii]
The timelines matter too. If December is a key earnings month or an entire team for a big December project is sent to timekeeping training before a deliverable is due, and the results could impact the bottom line and employee engagement.
3. Math: Calculate Time, FLSA Overtime correctly for Non-Exempt and any makeup payments for Exempt.
For all non-exempt employees that might work more than 40 hours in a week, time tracking by week and clear policies are critical to compliance. A popular response when employees are non-exempt is to implement a time system. Newly non-exempt employees may not have tracked their hours worked or completed other time tracking. The general guidance from the Department of Labor specifies, “As long as they are complete and accurate, employers may use any method they choose for tracking and recording hours.” Also, “Employers can also pay non-exempt employees on a salary basis and pay overtime for hours worked beyond 40 in a week.”[ix]
If a detailed tracking method is appropriate, providing mobile-friendly, just-in-time check in’s/out’s integrated with other features can help meet the needs for additional time tracking while balancing individual needs, team needs, and legal requirements. Include work on smart phones, other phones, off-hours emails, and texts, along with more typical standard time and overtime hours. An always on workforce often becomes eligible for overtime.
Confirm that your timekeeping can calculate time by week, hourly rate by position or labor allocation, and weighted overtime by week. For a non-exempt employee paid different hourly rates for some hours, the weighted average is calculated first: total of all applicable earnings (including hours worked at different rates) divided by the number of hours worked. When overtime is calculated this way, to calculate the overtime premium rate, multiply by 0.5. Next, for the amount of money for overtime calculate: overtime premium rate multiplied by overtime hours worked.[x] Because this method also pays the overtime hours at the rate before overtime, the resulting gross pay includes the overtime hours being paid at 1.5 of the weighted average rate. In some cases, the DOL has a 1.5 rate example, but be sure your systems can handle the full calculations when needed.
On a quarterly basis, consider whether any make-up payments are needed for salaried executives, administrators, professionals, or computer employees to meet the standard salary level test. Annually, confirm that any highly compensated employees have met that salary level, or whether a catch-up payment is needed.
This blog was written by Leila Woolheater, Assurance Guru at PeopleGuru™. This post may not be copied or published without PeopleGuru's express written permission.
[i] U.S. Department of Labor. (2016). Overtime Final Rule: Summary of the Economic Impact Study. Accessed from https://www.dol.gov/whd/overtime/final2016/overtimeFinalRule.pdf
[ii] U.S. Department of Labor. (2016). Small Entity Compliance Guide to the Fair Standards Act’s “White Collar” Exemptions. Accessed from https://www.dol.gov/whd/overtime/final2016/SmallBusinessGuide.pdf.
[vi] U.S. Department of Labor. (18 May 2016). Guidance for Private Employers on Changes to the White Collar Exemptions. (Page 5). Accessed https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf
[vii] Smith, Allen. (2 June 2016). Hospitality Industry Will Have to Weigh Options in Wake of Overtime Rule. SHRM. Accessed from https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/hospitality-industry-will-have-to-weigh-options-in-wake-of-overtime-rule.aspx
[viii] Wilke, Dana. (13 May 2016). Breaking the News: When Workers Loose Their Exempt Status. SHRM. Accessed from https://www.shrm.org/ResourcesAndTools/hr-topics/employee-relations/Pages/overtime-rule.aspx
[ix] U.S. Department of Labor. (18 May 2016). Guidance for Private Employers on Changes to the White Collar Exemptions. (Page 5). Accessed https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf
[x] U.S. Department of Labor. (July 2008). Fact Sheet #23: Overtime Pay Requirements of the FLSA. Accessed from https://www.dol.gov/whd/regs/compliance/whdfs23.pdf