On December 1, 2016, the U.S. Department of Labor will change the overtime eligibility standards under the Fair Labor Standards Act (FLSA). Since it is unlikely that any action will be taken to stop or delay implementation, here are some tips to consider.
1. Prepare in advance.
And by advance, I mean months not days. The time and effort needed to analyze and implement changes to comply with the new overtime rules will vary from employer to employer. It will depend on how many currently exempt employees are paid less than the new salary threshold and how your organization decides to treat them going forward.
2. Know what day it is.
While this is generally sound advice, it’s particularly important to know that December 1, 2016, is a Thursday. This may or may not coincide with your organization’s payroll cycle. If it doesn’t, you will want to “go live” with any exempt/nonexempt status changes no later than the payroll cycle that includes December 1, 2016.
3. Analyze and evaluate options.
There is no one-size-fits-all approach to compliance. Employers have options, each with its own costs and consequences. For example, one option involves increasing the salaries of exempt employees to at least $913 weekly ($47,476 annually). Another option is to make exempt employees whose salaries are less than $913 weekly nonexempt and pay them overtime. There are other options as well. Now is also a great time to review employee classifications, and take a fresh look at your pay practices.
4. Understand the big picture.
Although it’s important to focus on complying with the new overtime rules, it’s also important to keep things in perspective from a compensation management standpoint. For instance, raising pay for some employees to meet the new exempt salary threshold of $47,476 may fix one problem but create another – pay compression. Since the exempt salary threshold will more than double from the current $23,660, some employees could end up being paid the same as or more than their supervisors. Similarly, salaries for newly-hired employees could exceed those of employees with more tenure and proven performance. If so, it may be time to update or redesign pay ranges and compensation programs.
5. Consider the ripple effects.
In addition to pay, the new overtime rules may affect other employment policies, programs, and practices that are directly or indirectly tied to an employee’s exempt/nonexempt status. These include things like working remotely, having a company-provided smartphone, using mobile devices after normal working hours, timekeeping, and benefits eligibility. If jobs are reclassified, remember to update FLSA status on job descriptions and job postings in addition to your payroll and HRIS systems.
6. Train your managers.
For the most part, managers may have heard about the overtime rule changes, but it’s unlikely they will know what to do, say, or not say to employees who will be affected. Managers will be on the front line of communicating your organization’s decisions and implementing changes. They need to know the basics and understand their role in ensuring compliance with the new overtime rules. Make sure your managers understand what the FLSA requires and the changes that lie ahead. Clear up any misperceptions. Manager training and a comprehensive communication plan are essential to ensuring a consistent message and effectively managing change across your organization.
Remaining silent on how employees will be affected or not affected by the new overtime pay rules is not a good idea. Silence breeds mistrust. Left to their own imaginations, employees will draw their own conclusions and rumors about the changes may run rampant. Use this opportunity not only to communicate about the overtime changes that lie ahead, but also to highlight the strengths of your pay program.
8. Tell employees what to expect and what not to expect.
Communicate salary increases to employees who will be receiving them and explain why. Tell employees whose status is changing from exempt to nonexempt the reason for the change and what it means to them. Talk to them about changes they may see in their paychecks and in their everyday work lives, such as newly restricted work hours and requirements to record hours. It’s always good practice to notify employees well in advance of any changes in their pay. Check your state and local laws to ensure compliance with specific notice requirements. If employees are shifting from exempt to nonexempt status, this may be the first time in their careers they’ve had to record their work hours. Be sure to train employees on your timekeeping tools and rules.
9. Think carefully before making exempt employees nonexempt.
Reaching exempt status can be an important milestone in an employee’s career – losing that status, not so much. Employees may view a reclassification from exempt to nonexempt as a demotion, even if they stand to gain additional compensation by working overtime. In some cases, it’s unlikely that the monetary gain will offset the loss of status.
10. Use sound and conservative cost estimates.
Most organizations will incur additional compensation costs to comply with the new overtime rules, either through raising the salaries of currently exempt employees to the new salary threshold, or by making exempt employees nonexempt and paying them overtime. To make the best decision possible for your organization, it is important to ensure that the cost estimates for any scenarios that are being considered are as precise as possible. Accurately predicting and controlling overtime hours will be particularly important if the decision is reached to make exempt employees nonexempt. Understating the costs in the hope of lessening the negative impact of the news does not help anyone. Let the numbers speak for themselves and make sure your leadership team is listening.
And remember, this is not a one-and-done rule change. The overtime pay threshold will change again in 2020 and every three years thereafter as part of the new overtime rules.