FLSA OF TOMORROW HOW THE OVERTIME REGULATION COULD CHANGE

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1 24 OCTOBER 2015

2 COMING ATTRACTION: FLSA OF TOMORROW HOW THE OVERTIME REGULATION COULD CHANGE By Karen H. DiGioia Suspense. Drama. The Fair Labor Standards Act and the Obama Administration s proposed changes to it have all the characteristics of a cinematic success (except perhaps romance). On the following pages, our HR consultant, Karen DiGioia, offers the big picture: what could change and how to prepare. If it s good enough for Hollywood, it s good enough for me the triquel! What s a triquel, you may ask? To the best of my knowledge, it s not a real word but, for our purposes here, a triquel is the follow-up to a sequel, and that s what this article is. In this column, we ve spent time talking about the Fair Labor Standards Act (FLSA), not once but twice before (the April and October 2014 issues of Primary Agent magazine; see box on page 27). Thanks to the proposed regulation changes released by the U. S. Department of Labor (DOL) in July of this year, we re going to talk about it again. For business owners and managers, it s important to understand the changes that are proposed and the potential impact on your business. The purpose of this article is to allow you to plan for what is likely to occur in the near future. I will focus on the big picture in terms of changes, impact and planning. Once the regulation changes are finalized, there s always room for a fourquel to focus on all the details of the final regulation changes. 25

3 WHAT S THE FLSA? Just in case you missed the previous articles, let s start with a quick review. The FLSA was first enacted in 1938 and has been amended repeatedly over the years. Prior to the current proposed revisions, the most recent revision was in This act, administered and enforced by the Wage and Hour Division of the DOL, sets the standards for minimum wage and overtime and also sets child labor provisions. The FLSA includes very specific categories and definitions regarding which positions are exempt from overtime pay (exempt positions) and those for which overtime pay is required for time worked in excess of 40 hours in a work week (nonexempt positions). Details about the FLSA as it exists today can be found by reviewing the April 2014 issue of Primary Agent (see box on page 27). WHAT ARE THE PROPOSED CHANGES? In March 2014, a Presidential memorandum was released requiring the update and modernization of current overtime regulations. It stated that: Regulations regarding exemptions from the Act s overtime requirement, particularly for executive, administrative, and professional employees have not kept up with our modern economy. Following this Presidential call to action, it took until July 6 of this year for the proposed revisions to be published by the DOL. As I write this article, we are in the 60-day comment period which is scheduled to end on Friday, Sept. 4, (But, as things tend to go, by the time you are reading this article, this comment period may have been extended.) The primary changes that are proposed are: 1. Increase in the salary threshold from $455 per week ($23,660 per year) to $970 per week ($50,440 per year). This new threshold is based on the 40th percentile of weekly earnings for full-time salaried workers. For the first time ever, the DOL has proposed that this threshold be subject to revision on an annual basis tied to either the 40th percentile calculation or to the CPI-U. Either way, the DOL would determine the new threshold each year. (In case you were concerned, you would have to calculate it.) 2. Increase in salary requirement for qualification as a highly-compensated employee from $100,000 to $122,148. As with the salary threshold, the proposal would allow for annual increase to this level as well. 26 OCTOBER 2015

4 3. Historically, bonus payments have not been included in the compensation total to which the weekly salary threshold is applied. The DOL is considering inclusion of nondiscretionary bonuses and incentive payments (but only those paid on a monthly or more frequent basis) as compensation applied to the salary threshold test. Currently, no changes have been proposed to the duties tests which are utilized to determine qualification for exemption (as detailed in the April 2014 issue of Primary Agent), however, the DOL has requested feedback regarding the duties test, and it is possible that the final regulation will include changes to these. In asking for feedback, the DOL has included five questions related to the duties test, and these questions give us clues to additional changes that could be part of the final regulations. 1. Should any changes be made to the duties tests? 2. Should an employee have to spend a minimum amount of time on exempt duties to meet the exemption requirements? 3. Should regulations parallel the California rule which requires an exempt employee to spend 50 percent or more of his/her time on the primary duty of the job? 4. Should the DOL consider returning to a short and long duties tests format, as it did before 2004, where a longer and more detailed set of requirements must be met for exemption when the employee s salary does not meet the salary test? 5. Does the current executive exemption test that allows concurrent performance of exempt and nonexempt tasks adequately differentiate between exempt executives and employees who are not exempt executives? WHAT IS THE POTENTIAL IMPACT OF THESE CHANGES? The changes, once finalized, will have a significant impact on all employers regardless of size, industry or geographic location. According to the DOL s estimate, 11 million employees will be impacted by these changes. Eleven million! (At least they don t all work for you!) Many employees who have been classified as exempt (and therefore not eligible for overtime compensation) will no longer qualify for the exemption. This can have an impact not only on your overtime expenses, but also on the way these employees can work. As non-exempt employees, they will need to record their work time. At best, it will become more challenging to be as flexible as you currently may be with these employees. (No more Sure, it s no problem if you leave early for that doctor s appointment. or It s fine if you work from home that day. ) The good news is that these regulations are not expected to be finalized until later this year, at the earliest, and will not go into effect until sometime in This means you have time to be proactive and plan. WHAT IF ANYTHING SHOULD I DO NOW TO PREPARE? Do an analysis of any exempt employees who are paid a salary of less than the anticipated new threshold. If you have exempt employees who will not meet the new salary threshold, begin looking at the number of hours that they are typically working each work week. If it s in the neighborhood of 40, the impact of re-classification to non-exempt should be minor. However, if you have employees who are regularly FLSA FLASHBACK READ THE original Primary Agent magazine article (from April 2014) and its sequel (published in October 2014) that our HR consultant penned on the Fair Labor Standards Act (FLSA) by visiting our website. Unravelling the exempt vs. non-exempt mystery IABforME.com/resource_center/ exempt_vs_nonexempt How the FLSA applies to agency staff IABforME.com/resource_center/ FLSA_agency_staff 27

5 working well in excess of 40 hours, you will experience an impact. Your options here will be to: 1. Prepare to pay a boatload (it s a technical term) of overtime 2. Adjust the base salary to meet or exceed the new threshold 3. Reallocate responsibilities to fit into 40 hours a week 4. Add staff Admittedly, some of the above options are better than others. Chances are, option 1 isn t at the top of your list. Option 2 is reasonable only in those cases where the base salary is already close to the new threshold and an adjustment will involve a minor increase to expenses. In most cases, option 3 or 4 is your best bet. With option 3, you ll want to look at whether there are options for reallocating work that will decrease or eliminate all of those extra hours. I m certainly not recommending that you pile another employee under loads of work just to avoid paying overtime to other employees, but this could be an opportunity to equalize workload. In some cases, reallocation of work won t be an option because everyone is already at their limit. In this case, option 4 may be your most cost-effective option. For example, if you currently have two employees who are working 60 hours per week (I hope you don t, but if you do), it would be more cost effective to have three employees working 40 hours a week than to start paying those two employees 20 hours of overtime each week. Keep in mind: The numbers don t have to be so extreme for a staffing increase to be appropriate. Addition of a part-time resource or two working 10 or 20 hours a week might be enough. Be prepared for the potential need to reallocate work. All employees do nonexempt work. However, if the final regulations include a quantitative percentage test that is applied to the duties test (such as a floor on non-exempt work or a 50 percent requirement for the primary-duties definition), you may need to ensure that exempt employees are not spending too much (however that ends up being defined) of their time doing non-exempt work or that the primary duty definitely takes up 50 percent or more of an exempt employee s time. This may prove challenging for small businesses where there is often a need for everyone to pitch in and do whatever is needed. But, challenging or not, it may be necessary in the future to get more particular to who does what. Know what to say to an employee who might approach you about his or her classification before the new regulations are finalized. The proposed regulations, currently, are strictly that proposals. There is no need to make any change today. If you are in compliance with the current FLSA, you are fine. However, you ADDING STAFF IF YOU RE considering the author s suggestion to bring on a part-time staffer, take a look at Work At Home Vintage Employees (WAHVE). The contractstaffing solution pairs experienced pre-retiree insurance agents with independent agencies in need of staffing support without the commitment, time and cost of a full-fledged hiring process. What s more, IA&B members enjoy a 50 percent reduction of the one-time set-up fee. IABforME.com/WAHVE may have employees approach you with concerns. The best thing to do at this time is to let them know that you are aware of the proposals and are watching to see what the final regulations require. Assure them that you will be compliant with the final regulations and will make any changes appropriate at that time. Also, educate any other key employees in the agency about the proposed regulations and how to respond if an employee approaches them. Of course, if the comment period is still open when you are reading this article, feel free to provide your feedback to the DOL. So, take the time now to plan for the future, as we think it will look, but don t make any changes yet. If you have any questions or need clarification, there is a good bit of information on the DOL website and lots of articles on the Internet. And, as always, as an IA&B member benefit, reaching out to me is an option. I m just a phone call or away: or karen@mostellerhr.com. And make sure to pre-order your tickets now for the early 2016 release of FLSA The Fourquel! See you there! Karen H. DiGioia provided this article on behalf of Mosteller & Associates, IA&B s contracted human resources consulting firm. Reach out to Karen for more information on conducting an HR audit or with other human resources questions. IA&B s HR Solution is a compilation of products and services available exclusively for our member agencies that simplifies establishing or improving your human resources program. It includes base-level consultation and discounted professional services from Mosteller & Associates. Learn more at IABforME.com/emp_mgmt. 28 OCTOBER 2015