The New Overtime Pay Rules: A Dozen Top Don’ts

On December 1, 2016, the U.S. Department of Labor (DOL) will change the way overtime is paid under the Fair Labor Standards Act. While employers have a number of decisions to make, this post focuses on a dozen wrong turns employers could make on the road to compliance.

1. Don’t ignore the new rules.

Ignorance is not bliss, nor will the DOL recognize it as a valid defense to wage claims. It is highly unlikely that the new overtime rules will be modified or overturned before December 1.

“CFOs loathe expense surprises that hit the bottom line. If this topic is flying under the radar, now is the time to raise a red flag before a white one is needed.” Thomas V. Burke, Principal and Global Career Practice Leader

2. Don’t underestimate what needs to be done.

The scope of work required to comply with the new overtime rules will vary depending on the number of exempt employees paid salaries less than $913 weekly or $47,476 annually. Specific tasks include developing potential solutions and preparing cost estimates. Plans should be made to educate managers on the rule changes and to communicate pay or status changes to managers and employees.

3. Don’t fix one problem and create another one.

Increasing pay for some employees to get their salaries above the new threshold may eliminate one problem but create another one, such as pay compression. Since the exempt salary threshold is increasing by more than 100% from $23,660 to $47,476, workers can end up being paid the same or more than their supervisors. Likewise, salaries for newly-hired employees can surpass those of proven performers who have longer service. Now may be a good time to consider an overhaul of pay structures and compensation programs.

4. Don’t cut base pay to equalize compensation.

Employers with exempt employees currently making less than the new $47,476 threshold face increased payroll costs if they adopt either of the two most common solutions: 1) increase base pay above the new threshold, or 2) make the employees nonexempt and pay them overtime. There is a third scenario that is potentially cost-neutral. This scenario involves making the employees nonexempt and cutting their base pay so that their overtime gets them back to their original base pay levels. Although this may be cost-neutral from a payroll perspective, it may result in other harder-to-measure costs such as lower employee engagement, diminished productivity, and unintended turnover. Cutting pay is generally not a good idea and should only be considered as a last resort.

5. Don’t invoke a blanket no-overtime policy.

While there may be the need to cut some fat from overtime, it’s unlikely to be all fat. It’s important to understand why employees are working overtime and to craft an approach that strikes the right balance between supporting business needs and controlling labor costs.

6. Don’t change the status of employees from exempt to nonexempt without telling them.

If the decision is reached to change the status of employees from exempt to nonexempt, they should be told. Communication with this group should be handled carefully. Some impacted employees may have been expecting a pay increase. Others will regard this change as a demotion, even if there is a financial gain from overtime pay.

7. Don’t surprise the CFO.

CFOs loathe expense surprises that hit the bottom line. If this topic is flying under the radar, now is the time to raise a red flag before a white one is needed. Be sure not to underestimate current and future work hours and costs.

8. Don’t overlook other programs, policies, and work practices.

Exemption status changes may cause ripple effects related to other company policies and programs. Examples include: eligibility for certain benefits, working remotely, recording time, and using mobile devices after normal working hours. Also, don’t forget to update job descriptions and job postings if exemption status changes.

9. Don’t be silent.

Silence breeds mistrust and is definitely not golden in this situation. Employers should educate managers about the rule changes. Employees affected by a change in pay or exemption status should receive information specific to their situations.

10. Don’t assume that managers know what to do or say.

Managers will be on the front line of communicating and implementing changes, and yet it is likely that most don’t fully understand the new overtime rules. Managers need to know the basics and understand what they need to do to comply with the new rules. Training and a solid communication plan will be essential to ensure consistent messaging and implementation of changes across the organization.

11. Don’t wait until next year.

While this may be the mantra best suited for one’s favorite sports team, that’s not the case with the DOL. Their kickoff is December 1, 2016 and they will be on the field. Expect to see an uptick in DOL audits and lawsuits after December 1. Failure to comply with the new regulations from the start exposes organizations to the risk of penalties and enforcement actions.

12. Don’t go it alone.

Trying to address changes of this scale is risky business. There is a lot at stake. Mistakes can be costly and bad publicity can do irreparable harm to an organization’s brand and reputation. Seek professional assistance as needed.

And here’s a bonus tip . . .

13. Don’t think this is a one-and-done rule change.

The overtime pay threshold is scheduled to change every three years as part of the new overtime rules. Employers will need to repeat this exercise again in 2020 and beyond.

Look for my list of the top Do’s employers should consider in my next blog post.

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