As the deadline nears for complying with the new overtime rules of the Fair Labor Standards Act (FLSA), employers are evaluating their options and deciding on the best paths to take towards compliance. Polling results from two webinars we conducted in June indicate employers favor two main approaches:
- Increase employees’ pay above the new minimum threshold to maintain their exempt status (54%)*
- Reclassify employees as nonexempt and pay them overtime (76%)*
*multiple responses were allowed
Employers choosing the first approach will incur greater fixed costs, depending on both the number of impacted employees and the proximity of current pay to the new threshold. The second option will likely lead to higher labor costs as well, but may be less costly than the first, depending on the pay levels and overtime hours worked by employees who are reclassified. Every employer situation is different, so organizations should consider all options and costs based on their specific circumstances.
Implications to Consider
Beyond the direct costs, all paths to compliance carry hidden costs and potential risks. Even if it’s affordable, raising the pay of exempt employees above the new minimum threshold of $913 per week ($47,476 annually) is not a simple solution. After increasing pay, employers may find themselves dealing with pay compression problems with supervisors and employees in other jobs.
Also, raising an employee’s base salary above the new minimum threshold does not automatically make that employee exempt from overtime requirements since job duty tests still must be applied and met. The opposite is true, however: Paying an employee less than the minimum threshold automatically makes the employee nonexempt.
Technology and mobile devices have transformed how, when, and where work gets done. Many exempt employees routinely check and respond to emails or take telephone calls outside regular business hours. If these employees are reclassified as nonexempt, this time would have to be counted as hours worked and could trigger overtime pay.
If the employer wants to avoid paying overtime for work beyond the standard workday, work practices may need to change. Established routines are hard to break. Perhaps even more challenging is the need for managers to change their expectations about the availability of employees.
Whether perceived or real, the loss of status related to reclassifying employees from exempt to nonexempt can have a substantial impact on employee engagement. It’s important not to ignore or underestimate how classification changes may prompt a drop in employee engagement and result in productivity or talent losses.
In addition, don’t forget about any benefits, policies, and workplace arrangements – such as office space or telecommuting – that are linked to FLSA status. Reclassification of employees could affect their eligibility for some benefits and perks.
Penalties for FLSA overtime violations can include recovery of back wages, liquidated damages paid to employees, and civil penalties paid to the federal government. Cases of willful violation may be subject to criminal penalties that include fines and imprisonment. In addition, an organization’s reputation and the value of its brand could be tarnished if it is found guilty of violating the FLSA.
The Department of Labor (DOL) estimates that more than four million workers are affected by the new overtime rules, and the new rules will result in more than $1 billion in annual pay increases nationwide. Matters of this scope attract a great deal of attention by the regulators, the press, plaintiffs’ attorneys, and employees who are impacted by the changes that lie ahead.
What Employers Should Do
While the new overtime rules don’t go into effect until December 1, 2016, employers should begin a comprehensive evaluation of their workforce now so they can implement necessary changes. This evaluation should include the following steps:
- Develop cost estimates under various scenarios to determine feasible options.
- Revisit duties and responsibilities to make sure employees in any borderline jobs are correctly classified. Update job descriptions as needed.
- Ensure methods and systems are in place to record hours worked by nonexempt employees.
- Review common practices such as checking voicemails, sending/receiving emails, and taking phone calls outside regular business hours. Adjust policies and managers’ expectations as needed.
- Assess any potential employee engagement issues and risks.
- Review compensation programs and practices to ensure they do not violate or conflict with the new overtime rules. Modify or redesign programs if needed.
- Anticipate the ripple effect of the new rules on benefits and other employment-related matters.
FLSA has been among the most confusing and least understood of the major HR-related laws the DOL enforces. Managers may need additional information and training to ensure positive outcomes.
Organization-wide communication is vital since employees will want to know they are being treated fairly if pay actions and status changes take place. The new overtime rules make it more important than ever for leadership, human resources, and management to keep the lines of communication open with employees and each other.