FLSA Overtime Changes Exempt: Planning for Exempt vs… · businesses, such as when nonexempt employees are only going over by a few hours per week, the decision to ... Checklist
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Exempt vs. Non-Exempt: Planning for
FLSA Overtime Changes
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Table of Contents
Implications
Overview
Checklist
Analysis
Pg. 3
Pg. 11
Pg. 7
Pg. 5
In just a few short years, our talented, now 25yearold has the satisfaction of increasing his salary by 50
percent, but still under $50,000. He is working 5060 hours per week and remains motivated by his
growth. He is doing exactly what many young people seek right out of college.
He is a part of a business model that has allowed many types professional organizations to thrive while
allowing young, ambitious workers to gain experience and rapid promotion. It is also a business modelthe Department of Labor just blew up.
If your business is a firm or an agency – or generally relies on a labor equation that includes inexpensive
starting salaries + long hours + performancedriven culture to drive growth – it’s time to get real close to
your billing and payroll department. There are a lot of companies that will be impacted by the new rule, but
services firms may face some unique challenges.
As of December 1, 2016, $47,476 is the new Fair Labor Standards Act (FLSA) salary threshold for non
exempt employees – meaning anyone making less than that is now legally entitled to overtime. In some
businesses, such as when nonexempt employees are only going over by a few hours per week, the
decision to reign in overtime, or just pay it, will be obvious. And some employees will be close enough to
the threshold that a small raise may be in the best interest of the business and the employee.
However, many scenarios will warrant more creative thinking, and an understanding of what the regulations
allow.
SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA 15317. SALES@SENTRICHR.COM
A collegeeducated 22yearold makes $30,000 in a nonexemptclient relationship role at a service firm. After a year of longhours (and collecting overtime), he is promoted to an exemptposition and given a $5,000 raise. This pattern continues with1520 percent raises per year with growing responsibility.
The specifics of the new FLSA
regulation
What options you might have to address
different scenarios
How to analyze your workforce to see
who will be affected
In this ebook, learn:
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If you’re new to the Fair Labor Standards Act or need to brush up, you need to know that it establishes
minimum wage, overtime pay, record keeping and youth employment standards. The new rule specifically
impacts those who can receive overtime pay (nonexempt employees) and those who cannot (exempt
employees).
Released in May 2016, the final FLSA overtime rule has three key provisions expected to impact as many
as 4.5 million workers, mostly white collar:
SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA, 15317. SALES@SENTRICHR.COM
$47,476
It increased the standard salary andcompensation threshold for executive,administrative and professional workers to beexempt. The weekly salary threshold increasedfrom $455 to $913 ($47,476 annually).
It increased the total annual compensationrequirement for highly compensated employees(HCE) to $137,004 (up from $100,000). HCEs donot meet the minimal duties test typicallyrequired to be considered exempt, but can bequalified as exempt anyway because of theircompensation.
Beginning in 2020, the Department of Labor willautomatically update the salary thresholds everythree years.
Of note, the changes will allow employers to use
nondiscretionary bonuses and incentive payments to
satisfy up to 10 percent of salaries and did NOT affect
the duties test.
In short, beginning December 1, 2016, exempt
employees will have to make $913 weekly AND pass
the duties test.
The New FLSA Salary
Threshold for Overtime
What's in the Regulation?
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While the Department of Labor lays out several
reasonable options for employers, there are other
factors to consider:
Morale. Often being an exempt employee is astatus symbol, and employees who do not
understand the law may see changes as a
demotion. Communication and education will be
critical to explaining what the changes mean.
Salary bands and job descriptions. If yourexempt / nonexempt roles tend to be by job title,
but the salaries that correspond to those titles
range both under and over the new threshold, you
may want to create an exempt and a nonexempt
position for the same job title.
SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA 15317. SALES@SENTRICHR.COM
ImplicationsTraining and onboarding. Additional staff may bea reasonable solution for companies who cannot
reduce overtime or rationalize pay increases.
While the decision to add staff may be reasonable,
the costs of onboarding and training new talent
should be considered.
Time tracking. Many businesses impacted by thenew overtime rule may already be accustomed to
tracking hours for billing purposes, but employees
might not be tracking every administrative hour –
meaning that all working hours may not be
accounted for in existing systems /processes.
While FLSA reporting standards do not require
employees to punch in and out, they will have to
track the number of hours they work in a day. This
will need to include hours worked from home or
while traveling. Online time and attendance
systems are an easy way to do this, but will be a
new factor in the lives of many white collar
workers.
The Department of Labor suggestspossible courses of action:
1) Increase the employee's salary (who
passes the duties test) to $47,476 and keep
their exempt status;
2) Pay an overtime premium of 1.5x the
employee’s regular rate of pay;
3) Reduce or eliminate overtime hours;
4) Reduce the amount of pay allocated to
base salary (provided the employee still
makes more than minimum wage) to
account for overtime hours to hold the
weekly total constant.
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SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA 15317. SALES@SENTRICHR.COM
Implications
Traveling. Speaking of traveling, most white collarworkers who travel will have no idea how to count
time on a plane or in a car towards hours worked.
You’ll need to review company policy with them
and make sure they have access to a tool that
allows them to track time remotely.
Lunch time rules. If many of your employees areworking through lunch or heading out for lunch,
you may want to make new policies around paid
vs. unpaid lunch and how that time is tracked. An
employee who works through lunch could quickly
accumulate 510 hours of overtime per paycheck
without ever staying late.
Client / customer expectations. If you rely onlowerpaid, exempt employees for client / customer
relationship management and those clients have
access to your employees after work hours, you
will need to make some decisions on how to track
or limit those interactions. If your business model is
based on billable hours, do you transfer the OT
cost to your clients?
For consideration:Should clients have accessto nonexempt employeesafter work hours?
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You just survived Affordable Care Act yearend filing, probably absorbed new costs to stay compliant and
just sat down to breathe for a minute. And here comes the Department of Labor with FLSA changes and you
have to head right back into your CEO or CFO’s office and tell them you have another compliance challenge
with potential farreaching financial implications.
Their first question is going to be: What’s the plan to address it? Below you can find different options that you
can take as part of a plan to review with your CFO / CEO or you can take the results of these efforts to them
as a part of your recommendations. Whether you start with plan approval or more concrete
recommendations will depend on your culture and relationships.
Start with your job descriptions and corresponding salaries. Even though the exemption applies to theindividual and not the job classification, this may be a quick way to find groups of similar employees likely to
be affected. Many companies include whether a position is exempt or nonexempt in their job requisitions.
Typically, there is a salary range associated with that job and you’ll want to find all currently exempt positions
that start below the threshold and be sure to include positions that can also eventually exceed $47,476. Pull
the job descriptions and identify the leader(s) who manage those roles; you’ll likely need to engage them
soon.
Identify who will be impacted. Now that you know which jobs are impacted, start looking for employees inthose positions whose base salary is under the threshold. Payroll data will be the most accurate. Consider
organizing this by department, then by title so you can talk to department heads about which positions and
individuals are impacted.
Add in other salary information. Since the new rule allows for 10 percent of salary to come from nondiscretionary bonuses and commissions, pull any additional compensation data for employees. According to
the Department of Labor, “
Nondiscretionary bonuses and incentive payments are forms of compensation promised to employees, for
example, to induce them to work more efficiently or to remain with the company. By contrast, discretionary
bonuses are those for which the decision to award the bonus and the payment amount is at the employer's
sole discretion and not in accordance with any preannounced standards.”
In your analysis, do not include discretionary compensation and do not exceed 10 percent of the employee’s
total compensation with nondiscretionary compensation.
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Analysis
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To use this calculator, you’ll need to have already identified the jobs and employees you want to review.
Add them to the spreadsheet and plug in the employee’s base salary along with their nondiscretionary
compensation (just enter 0 if they don’t receive any).
Have managers or employees provide estimates for how many hours they work per week on average per
year. If your organization is a white collar organization that doesn’t track all worked hours, you may want to
have employees track time for a month to get a more accurate idea of how much they are working,
including whether it’s through lunch or from home. Manager estimates could work, but may also be
subjective or based on how they think an employee's hours should look.
Once you have base salary, hours worked and nondiscretionary compensation, the calculator will generate
the difference between their total compensation and $47,476 (the new threshold), their hourly wage (based
on total comp), and how much you might expect to pay the employee in overtime if the average weekly
hours expanded the entire year.
It’s not an exact science (it doesn’t account for time off for example), but it will give you a strong jumping off
point to help you determine your next steps.
SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA, 15317. SALES@SENTRICHR.COM
Organize financial information for discussion. If you have an HRIS or payroll software thatincludes salary planning, you may be able to work within it to get the information you need.
Alternatively, below is a screen shot of a downloadable excel calculator / planning template that
can help you assess the costs associated with your various options.
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Establish your plan B. Soon you’ll be meeting with department heads to see if they have uniquesituations that need to be addressed or if they want to have different plans for different individuals. This
may be easy in smaller organizations, but will quickly become challenging with larger companies. Before
you meet, you’ll want to know what you plan to do to ensure rapid, universal compliance for everyone.
Your compliance plan may be as simple as telling department heads that all employees under the
threshold will be reclassified as nonexempt and begin punching a time clock and receiving overtime
beginning December 1. Be sure to offer a deadline for input well in advance of that date. Whatever your
plan B is, you’ll want to be able to tell leadership what will happen if they provide no additional insight /
concerns. It’s possible this could have major implications for team budgets and P&L’s.
Meet with department heads. At first glance, the easiest approach might be to make Plan B your Plan A.
However, there are a lot of reasons to talk to managers / department heads. If they aren’t actively
managing the change, staff peers may quickly identify who is now being managed for overtime and who is
not – along with who is making over $47,476 (especially if you didn’t previously have employees tracking
time). Moreover, management can help you understand who is and should be working overtime, how
often and whether your forecast for overtime potential is accurate.
It may be a good idea to ask the following and document it on a peremployee basis:
Having leadership and managers buy in and discretion will help minimize inadvertent salary comparisons
and
dips in morale. Make sure they understand the law’s implications and consider using a document like the
OT calculator to help guide the conversation. They can provide the right team and work load insights,
along with steps that can be taken to maintain morale.
Some departments may see the change as an opportunity to evolve team structures or promote / demote
(based on performance) certain employees. If a demotion includes a classification change from exempt to
nonexempt, make sure you review applicable company policies with the employee, like timekeeping,
overtime, offtheclock work, and scheduling. And in cases of promotion and demotion, you may want to
issue an updated employment offer letter and request so the employee can read and acknowledge the
new job description.
SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA, 15317. SALES@SENTRICHR.COM
Finally, keep in mind that the new rule did not affect exemptions for the salary level and salary
basis requirements for outside sales employees, licensed or certified doctors, lawyers and
teachers. Employees in these occupations who meet the duties test are exempt regardless of
their salary. Other positions however, must meet the salary and duties test, even if they have high
bonuses or commissions.
Does this employee ever work more than 40 hours per week? Please keep in mind that if they
regularly work through lunch, it counts.
When the employee does work more than 40 hours, estimate how many over 40.
How often are they working more than 40 hours? Does it tend to be seasonal? Occasional? What is a
solid estimate for average weekly hours?
If regularly over 40 hours, can the work load be managed to a 40 hour week? Can it be redistributed?
Are there any performance issues that should be addressed or can be addressed – positive or
negative?
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In your meetings with department leads, consider discussing whether they want to track time for any
exempt employees. This may sound silly, but having an entire team start tracking hours worked may be
less of a blow to morale than singling out a handful of people who now notice who has to punch and who
does not.
Even though employees who go from exempt to nonexempt may have the chance to earn more money
through overtime, they may resent the change. They may feel that tracking time is beneath them or makes
them feel micromanaged, or that what they do isn’t valued. Be prepared to challenge the mindset and to
encourage a positive way of looking at the transition to time tracking.
Formulate your communications plan. It may be tempting to write a letter or send an email thataddresses the pending changes. Written communications are detailed and will give you plenty of space to
cover your bases. However, written communications are rarely read in full (or at all if they are long) and in
this case, should only be a part of the transition roll out.
Webinars, companywide presentations and team meetings are all valid ways to explain what’s happening
on a macro level. Make sure everyone knows the change is coming before they find out through a letter or
through company gossip that they, as an individual, will be affected. Then follow up with written
documentation / emails, and individual plans so no one is taken by surprise.
This level of communication may seem like overkill, but transparency and making sure everyone has the
same information at the same time may help eliminate speculation, fear and resentment. Even those who
will maintain their exempt status should be aware of what’s happening so they don’t inadvertently
speculate or seem surprised if a peer mentions a change in status to them. In companywide
communications, consider formally presenting:
When you finally communicate with individual employees about their transition to nonexempt status, be
clear that the change has nothing to do with their performance or their importance to the company.
Reiterate it has everything to do with compliance. Encourage managers to take this opportunity to praise
their work and value what they bring to the organization. Be specific. These employees may not be able to
immediately shake the feeling that this is a bad thing. You can help by building them up.
SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA, 15317 SALES@SENTRICHR.COM
Determine how you will track hours. If you already have a time and attendance system, you’llneed to add additional seats to your contract. If you don’t have a partner and don’t want to track
manually, you’ll want to begin that search immediately (implementation can take some time). If
you already track billable hours, talk to your finance department about the capabilities of the
system and whether it can also handle time punching.
What’s in the FLSA OT rule;
How the FLSA changes were made to benefit them;
Classification changes are coming;
Company policies relating to overtime, including lunches, travel and work from home policies;
Time tracking changes;
How and when you plan on communicating classification changes to individuals.
Depending on your culture, explaining the financial implications and how decisions were made may
be appropriate.
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Execute the change. Hopefully this is the stuff you do allthe time and already have HR and payroll software to makeit easy. The below is a quick check list:
SENTRIC, INC, 2400 ANSYS DR, SUITE 101, CANONSBURG, PA, 15317. SALES@SENTRICHR.COM
Update job descriptions with new classifications
Update employee classifications
Update payrolls if necessary
Make sure you have a process for how your time tracking willconnect with your payroll schedule
Issue affected employees new offer letters
Have employees who are changing to a nonexempt statusreview and sign company policies relating to overtime, travel,time tracking and lunch
Determine how often you will evaluate overtime andclassifications for nonexempt employees and how thatprocess will look. Keep in mind the law will increase thethreshold every three years beginning January 1, 2020. If youdo annual or regular pay increases, you’ll want to keep a closeeye on when it becomes more cost effective to move anemployee to an exempt status.
Checklist
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