Personnel e.bulletin – July 2016

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2016 FLSA Changes – The New Overtime Rules

Prepared for the PHCC Educational Foundation by TPO, Inc.

The Fair Labor Standards Act (FLSA) is a federal regulation that establishes the federal minimum wage, overtime pay eligibility and rates, and recordkeeping requirements, among other things.  It requires many employers to pay employees who fall under a specific salary threshold (non-exempt employees) overtime of 1-1/2 times their regular rate of pay when they work more than 40 hours in a workweek. Employees with salaries above that threshold and who meet the duties test of a specific job description in the executive, administrative, professional, computer, or outside sales employee categories are exempt from the overtime protection.

The Department of Labor (DOL) recently made significant changes to the FLSA’s overtime rules that could affect your business. Here is what you need to know.

The Overtime Changes

The DOL released its overtime changes May 18, 2016 and they will go into effect December 1st.

The DOL’s final rule did the following:

— Most significantly, the annual salary threshold will increase from $23,660 to $47,476 (or from $455 to $913 per week). If an employee earns less than that $47,476 threshold and works more than 40 hours in a workweek, the employee must be paid overtime. So employees who earn less than $47,476 need to be reclassified as nonexempt.

If an employee’s current job description qualifies for exempt status based on the duties test, the company may choose to increase the employee’s salary to keep him or her exempt. For more information on job duties tests, please see the appendix to this article from our September 2015 e.bulletin.

–The DOL will automatically update the salary levels every three years. The next update will be January 1, 2020.

–The annual threshold for highly compensated employees – who perform at least one of the duties or responsibilities of an administrative, executive, professional, computer, or outside sales employee – to be considered exempt without having to pass the duties test has increased from $100,000 to $134,004.

–Employers can count non-discretionary bonuses and commissions that are paid at least quarterly toward 10 percent of the annual salary threshold. Employers can also make a catch-up payment at the end of the quarter to ensure employees meet the threshold.

There are no changes to the duties test used to determine whether administrative, executive, professional, computer, or outside sales employees earning more than the salary threshold may be classified as exempt from overtime protections.

How to Prepare for the Changes

To prepare for the December 1 deadline, examine your employee classifications.  First, make sure that all current employees, and any new hires between now and December 1st, classified as exempt meet both the duties test and the new salary requirement.

If any employees classified as exempt don’t meet those requirements, they will have to be reclassified, or other action must be taken for you to remain in compliance.

Finally, keep track of regulations in your state. States may enact wage and hour rules that differ from the federal overtime requirements. Follow whichever rules are more generous to employees.

Once you’ve examined your business, you’ll have to make some decisions to both comply with the new rules and minimize their impact on your business.

Consideration #1: Controlling Costs Through Salary and Classification

Here are a few possibilities for how you can control costs to your business if some of your employees need to be reclassified. All these methods have their benefits and drawbacks so think about them carefully.  Some may work better for your business based on your costs, but apart from that, they could affect employee satisfaction and turnover:

  • If employees would need to be reclassified from exempt to non-exempt under the new rules, you can bump up their salary so that they remain exempt. As long as they also meet the duties test to be exempt they won’t need to be paid overtime.

Can you afford to increase salaries (with the accompanying decrease in overtime hours)?  If you decide to increase salaries, you will need to check each time the threshold adjusts to make sure the salaries are still above it.

  • Decrease employees’ hourly rates so that when they’re paid overtime, they’re paid the same amount as previously.

If you reduce hourly rates, employees won’t be happy about a drop in their regular wages, even with an explanation of the overtime offset. Also, will it be difficult for you to ensure that the overtime fully compensates for the loss in regular pay?

  • Reclassify employees as non-exempt but restrict hours to avoid overtime.

If you choose to restrict overtime, is it feasible for you to track and carry on your business?

  • Hire part-time workers to offset the restricted overtime.

How will the workers who lose their overtime pay react when part-time help is added? What are the training and other costs associated with adding new employees? Is it worth the tradeoff?

  • Reduce fringe benefits.

And finally, employees might not be pleased with the loss of fringe benefits.  But could you compensate for that loss by offering options with lower costs but that might appeal to employees, such as flexible scheduling?

Once again, it’s important to discover what works for your business and to start implementing now so that you’re not caught off guard when the rules go into effect in December.

Consideration #2: Tracking Time

If you have more employees classified as non-exempt and therefore need to keep close track of their hours, you’ll have to ensure your timekeeping procedures and systems are up to the task.  Here are a few ideas to keep in mind:

  • Train or re-train employees who will become non-exempt to use your company’s timekeeping methods so that they get used to being aware of their hours and their 40-hour limit.
  • Use a computerized timekeeping system that keeps track of the actual beginning and end of each work period, including unpaid breaks. There are mobile applications available that don’t require expensive hardware.
  • If you use periodic time sheets, train employees to record their time each day rather than at the end of the pay period so that their hours are accurately recorded. Also, emphasize that this includes hours worked outside official start and end times, such as time at meals or outside the workplace.
  • Have employees sign off on their hours to help prevent off-the-clock work claims.
  • Make sure to clearly communicate your timekeeping policies and procedures to employees.
  • Regularly check to make sure employees’ hours are accurate.

Restricting employees to their 40 hours might also require a cultural change in your business.  Employees might be used to working until the job gets done.  Emphasize that working 40 hours might not mean a strict 9-to-5 schedule; rather, employees might work more one day and less the next based on need. Establish that overtime must be approved in advance by a manager.

Consideration #3: Employee Morale

It’s also important to start thinking through the changes you’ll make to accommodate the new rules so you can start communicating with your employees about any changes as soon as possible.

Consider the effect on all your employees of any salary decisions. For example, if you decide to raise some employees’ salaries, what will other employees think? You don’t want to significantly alter internal pay equity.

Employees who are moved from the exempt to the nonexempt classification will most likely be hurt because – whether fair or not – employees tend to think of losing the exempt classification as a loss in status. Tell these employees that the change is based on objective standards and government rules and that it doesn’t represent loss of responsibility or prestige.  You could also mitigate any dissatisfaction by pointing out that employees will be paid for any overtime work.

Also keep in mind that the DOL rule doesn’t require affected employees to become hourly workers; they can remain salaried employees but must be paid overtime. If you decide not to change that classification in following the new rules, consider whether that would increase your costs, complicate recordkeeping, or in any way prevent you from complying with the FLSA.

As mentioned above, employees who are suddenly required to track their hours will face a culture shock and need to get used to recording their time as soon as possible. You must not only soften the blow of this change, but also make clear to employees that only specific types of work are allowed outside normal work hours; how much time can be spent working outside normal hours; and the necessity of tracking time.

Conclusion

With such a sea change in employment law, you must consider what’s best for your business and employees, and communicate that from the very beginning.  As with any such change, you can consult the DOL website with any further questions and concerns about the FLSA changes, and an HR professional or employment attorney can offer further advice.

Appendix
Job Duties Testing, from our September 2015 HR Personnel e.bulletin

The job responsibilities of every position in a company, from the CEO to an entry-level apprentice, should be reviewed as the basis for classifying positions as exempt or non-exempt. A position may be classified as exempt only if the job duties fall under one of the following categories as defined by the regulation:

  • Executive
  • Administrative
  • Professional
  • Outsides sales
  • Computer professional
  • Education Administrator
  • Business owner

There is also a Highly Compensated classification for those employees whose annual compensation is at least $100,000 (changing to $134,004 in Dec. 2016) and who are paid on a salary basis, perform office or non-manual work, and customarily and regularly perform at least one of the duties or responsibilities of an exempt Executive, Administrative, or Professional employee.

However, regardless of the amount of annual compensation, the Highly Compensated exemption is not available for non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, craftsmen, laborers, and other employees who perform work involving repetitive operations with their hands, physical skill, and energy.

For the purposes of this article, we will focus on the Executive, Administrative, and Professional exemptions. Checklists for determining whether or not a position is exempt under these three categories can be found at the end of this article.

Executive
In addition to the salary requirements mentioned above, the Executive exemption applies only if the following three requirements are met:

  1. The primary duty must be management of the organization or of a customarily recognized department (such as finance, legal, human resources) or subdivision (benefits, training, compensation, etc.);
  2. The position customarily and regularly directs the work of two or more full-time, or full-time equivalent, employees; and
  3. The position includes the authority to hire or fire employees or provide suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees that are given particular weight.

Administrative
This is the category that often causes confusion and results in misclassification of positions. In addition to the salary requirements mentioned above, an employee’s position will qualify under the Administrative exemption if the following two requirements are met:

  1. The primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
  2. The primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

To meet the requirement of “management or general business operations,” the employee must perform work that is directly related to assisting with the running or servicing of the business. This means that employees who are acting as advisors or consultants to their employer’s customers, such as tax experts and financial consultants, could be exempt, but employees who sell a product in a retail or service environment would not.

The term “matters of significance” refers to the level of importance or consequence of the work performed. That is, does the employee perform work that affects business operations to a substantial degree?

The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures, or specific standards described in manuals or other sources. It does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent, or routine work. For example, an employee who simply tabulates data is not exempt under the Administrative category, even if that person is called a “statistician.”

Professionals
Professionals can be classified as either “learned” or “creative.” In addition to the salary requirements discussed above, the learned professional exemption only applies if:

  1. The employee’s primary duty is the performance of work requiring advanced knowledge,
  2. In a field of science or learning, that is
  3. Customarily acquired by a prolonged course of specialized intellectual instruction.

The FLSA regulation states that work involving routine mental, manual, mechanical, or physical work is not deemed to be work requiring advanced knowledge, and states specifically that advanced knowledge cannot be attained at the high school level.

Fields of science or learning do not include the mechanical arts or skilled trades. The learned profession exemption is not available for occupations that may be performed:

  • With only the general knowledge acquired by an academic degree in any field;
  • With knowledge acquired through an apprenticeship; or
  • Through training in the performance of routine mental, manual, mechanical, or physical processes.

This exemption also does not apply to occupations in which most employees acquire skill by experience, such as accounting clerks and bookkeepers who normally perform a great deal of routine work, paralegal and legal assistants, and engineering technicians.

This article is intended to give you guidance in classifying your company positions and the employees in those positions as either independent contractors or employees and as either exempt or non-exempt. You should also see the DOL Reference Guide http://www.dol.gov/whd/regs/compliance/hrg.htm for information on FLSA requirements not covered in this article. That being said, no article can cover the particulars of every employment situation, and the ramifications of misclassifying a worker can be significant, if not overwhelming, to a business. Consequently, it is best to check with your employment attorney or human resources professional when making classification determinations, or better yet, proactively conduct a company-wide audit of employment classifications before the DOL comes knocking at your door.


This content was developed for the PHCC Educational Foundation by TPO, Inc. (www.tpo-inc.com). Please consult your HR professional or attorney for further advice, as laws may differ in each state. Laws continue to evolve; the information presented is as of June 2016. Any omission or inclusion of incorrect data is unintentional. Please note this article is not intended to provide legal advice or to substitute for supervisor employment law training.

The PHCC Educational Foundation, a partnership of contractors, manufacturers and wholesalers was founded in 1987 to serve the plumbing-heating-cooling industry by preparing contractors and their employees to meet the challenges of a constantly changing marketplace. If you found this article helpful, please consider supporting the Foundation by making a contribution at http://www.phccfoundation.org
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