FLSA Regulation Changes (Effective December 1, 2016) June 2016

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1 FLSA Regulation Changes (Effective December 1, 2016) June 2016

2 FLSA Regulation Changes Changes Non-Exempt if paid a salary below the minimum salary level threshold. Minimum Salary Level If paid above the minimum salary level, but below the highly compensated level, employees are exempt if they meet the duties requirement. Bonuses and incentives paid at least quarterly apply to the minimum level. Highly Compensated Level Exempt if paid above the highly compensated level and customarily and regularly perform at least one of the exempt duties of an executive, administrative, or professional employee. Current: $23,660 Final Rule: $47,476 (100+% increase) Current: $100,000 Final Rule: $134,004 (34% increase) Issue Changes to Salary Level Test Minimum Salary Level set at 40th percentile of weekly wages of the lowest national census group Highly Compensated Employee Required Annual Compensation Level at 90 th percentile of all full-time salaried employees Salary adjustments to 40th and 90th percentiles made every 3 years, with first update applying January 1, 2020 Impact Labor expense and worker deployment Federal and State Wage and Hour Laws (California significant impact) applied to more workers Timekeeping and payroll compliance Technology (HRIS, Payroll, Time and Attendance) Operational impacts such as scheduling, staffing mix, meal breaks, flex time, paid time off, bonus plans FLSA Target All Employers but heavy hit industries will be: Healthcare Retail Financial Services Hospitality State Government Multinational organizations with U.S. based populations Actions Needed Exempt to hourly data analysis for cost impact FLSA job review to assess compliance with new regulations and needed policy updates FLSA technology / process reviews to assess compliance, readiness, and monitoring Budget Forecasting to assess financial impact of increase in overtime and other pay practices Review of compensation and benefit plans 2 Copyright 2016 Deloitte Development LLC. All rights reserved.

3 Impact of FLSA Changes DOL anticipates around 4 million current exempt employees across all industries will be converted to non-exempt status and, as such, will become eligible for overtime compensation. This change has far reaching implications for organizations Potential Impact to Employers Actions to Consider Financial Impact Without deep analysis and strategy around the regulatory changes, organizations face increased salary and benefits costs Determine financial impact due to increases in overtime, other pay practices, headcount and systems Technological Impact In addition to classification, compensation and benefit system changes, employers will need to track and manage more individuals in time and attendance that were not tracked in the past Review technology / process to assess compliance, readiness, and determine process for ongoing maintenance / monitoring People Impact Reclassification of some positions from salaried to hourly may cause recruitment and retention issues and result in additional business costs due to employee turnover Mitigate employee relations impact by developing employee communications and change management plans Operational Impact Operations such as scheduling, staffing, and training may require change to accommodate the new rules as employees are moved from salaried to hourly pay Update FLSA impacted policies, procedures and systems, and adjust staffing models and scheduling processes, as needed Train HR personnel regarding impact of regulations and effected employees for any new job responsibilities Ongoing Impact Salary level requirements are expected to be adjusted every 3 years beginning in 2020 so employers will need to implement processes and tools to assess changes to maintain compliance to the new rules Conduct FLSA job review to assess ongoing compliance with new regulations Evaluate labor data for costs 3 Copyright 2016 Deloitte Development LLC. All rights reserved.

4 Background: New overtime exemption regulations Timeline of the new changes: March 18, 2014 July 6, 2015 May 23, 2016 Presidential Directive Issued: Regulations are outdated Millions of Americans lack the protection of overtime Direct you to propose revisions to modernize Americans have spent too long working more and getting less in return Administration objective could not be more clear wages are expected to increase Proposed regulations released: Proposed changes to the minimum salary level and highly compensated level No changes to the duties test DOL anticipated around 6 million current exempt employees across all industries would be converted to non-exempt Proposed regulations attract over a quarter of a million comments Final regulations released: DOL reduces the minimum salary threshold change from July 2015 proposal DOL estimates new rules will lead to 4 million current exempt employees being converted to non-exempt Non-discretionary incentives paid at least quarterly can be counted for up to 10% of the salary threshold Employers have until December 1, 2016 to comply U.S. Sen. Elizabeth Warren, D-Mass., Updated overtime rules will give millions of working families a fighting chance to build more financial security for themselves. Copyright 2016 Deloitte Development LLC. All rights reserved.

5 Potential impacts for consideration Financial impact Due to salary changes organizations could face increased pay and benefits costs Where and how to find funds for (a) these added expenses and (b) the cost to update our business and systems Salary level adjustments are expected to be adjusted every three years, therefore financial impacts will be ongoing People impact Seek to understand your company culture and how employees might perceive this change Leadership who may not have previously managed non-exempt workforce Employees; some may feel downgraded with movement to non-exempt status but some may welcome changes Technology impact Timekeeping and scheduling systems will have to be updated for these new hourly workers Training impacts for both managers and employees directly impacted, who will possibly need to use new system functions Tools to monitor hours and cost ongoing Operational impact Daily staffing may have to be changed to reallocate workloads and help ensure proper coverage during operating hours Changes/updates to policy and processes required for areas such as scheduling, staffing, travel and training to accommodate new rules Training around new procedures, policies and pay Copyright 2016 Deloitte Development LLC. All rights reserved.

6 Financial Impact Organizations face increased salary and benefits costs as well as associated costs for headcount and scheduling systems; all of which could impact the bottom line Implications of New Regulations Updated FLSA requirements could result in significant bottom line impact The organization may lack funds to comply with the new regulations in current state On-going unnecessary costs being accrued in an effort to comply with FLSA Actions to Take Perform cost analysis on salaries before/after FLSA changes to see if the organization can adequately compensate employees Analyze budget to see where organization can leverage certain cost-saving opportunities to aid in developing a cost-effective FLSA strategy Evaluate yearly financials to address costs that are accrued on areas no longer relevant to FLSA 6 Copyright 2016 Deloitte Development LLC. All rights reserved.

7 Technological Impact Implementation of the new FLSA rules will require changes to systems and processes. These changes need to be planned for to ensure smooth transition. Time-Keeping Systems Additional license required for new timecards Increase need to track locality based hours for unique overtime rules and tax reporting Impact how time traveling for business is tracked, paid and impacts total and overtime hours Change how current project based workers track time Increase need to track total eligible hours for ACA Have to automatically switch < 1.0 FTE to hourly Payroll Complicate payroll deductions through timecards Consider if newly Non-Exempt have a change in eligibility for certain benefits based on number of hours they work Taxes may differ on a monthly basis if the number of hours worked fluctuates 401(k) and 403(b) deductions may be impacted Change how bonus payments influence job classification based on being counted in total salary Carry out analysis to determine what pay group and pay rules newly Non-Exempt employees should have (e.g., if they would be accessing premium pay) Other Carry out testing that the correct pay rules are being applied (4 8 week process depending on testing environments) Consider additional time burden for timesheet audits Change how telework needs to be managed Alter how employees request time off Change to the number of workers subject to local regulations for time off and scheduling (ex: San Francisco) 7 Copyright 2016 Deloitte Development LLC. All rights reserved.

8 People Impact Explaining the change in exemption status will need to be done thoughtfully. Some impacted employees may feel demoted by this change Do not underestimate the depth of change; communications can help: all to understand updated policies, practices, duties associated with the change; managers understand how to manage non-exempt staff; and employees understand the rationale behind the change and how to operate in the new environment; it is about managing cost and ego. Effective Change Management Plan Develop a Change and Communications strategy Involve interdependent areas of the business early (e.g., Finance, I.T., Legal etc.) Carry out a change assessment Plan data gathering; interview employees and leaders on working hour habits Update policies to support changes Should follow initial inform meetings 8 Copyright 2016 Deloitte Development LLC. All rights reserved.

9 Operational Impact Operational changes to scheduling, staffing, and use of systems and processes will require talent management and training of impacted employees and managers Potential Operational Implications Train HR personnel regarding the impact of regulations and expected implications Training for managers on labor coverage, change management & effective communication with their teams Provide training for Impacted Employees for any new job responsibilities including timekeeping and holiday request procedures Assessment of required updates to talent policies and tools such as job descriptions which will be impacted by FLSA Consider any possible changes to union status and these implications Impacts to work schedules and labor coverage, and possible redistribution of hours; cost of hiring could also increase 9 Copyright 2016 Deloitte Development LLC. All rights reserved.

10 Ongoing Impact Triennial updates to the Minimum Salary Level and Highly Compensated Level will begin January 1, 2020 to align thresholds with market salaries Systems and processes should automatically update for new limits OR a triennial analysis should be carried out Organizations should carry out analyses and implement required changes now. Business logic and rules should be set now so that a consistent approach is adopted with new hires and when levels change in Consider the need for ongoing analysis to determine the most cost effective classification of job titles 10 Copyright 2016 Deloitte Development LLC. All rights reserved.

Key stakeholder perspectives: The C suite Executive thoughts and concerns might include: How are we going to pay for this? Who should own this? Are my systems able to handle these changes?

11 Key stakeholder perspectives: The C suite Executive thoughts and concerns might include: How are we going to pay for this? Who should own this? Are my systems able to handle these changes? I need alternative strategies to managing our workforce and finding savings to mitigate these costs What are the total costs associated with our employer obligations linked to wages and operational costs to update our systems? We operate in many low labor cost markets, what are the direct labor cost impacts of the various compliance options? 11 Copyright 2016 Deloitte Development LLC. All rights reserved.

Key stakeholder perspectives: The managers For those who must implement and manage, the issues go deeper: We ve had to reclassify our key entry to mid professionals; how do we manage these people and

12 Key stakeholder perspectives: The managers For those who must implement and manage, the issues go deeper: We ve had to reclassify our key entry to mid professionals; how do we manage these people and labor costs? How are we going to maintain labor coverage during operating hours without salaried worker flexibility? Turnover has accelerated and exit interviews indicate morale problems Some of my employees, with this overtime, may make more than me! Why do they complain? Other employees ARE complaining about THEIR wages being too low now We will need to pull teams together to assess what is needed to update systems, processes and other operational supports to get ahead of this 12 Copyright 2016 Deloitte Development LLC. All rights reserved.

Key stakeholder perspectives: The employees Employees could experience the most direct impact: It may not be realistic to get this work done in 40 hours My friends at Company X, with the same exact

13 Key stakeholder perspectives: The employees Employees could experience the most direct impact: It may not be realistic to get this work done in 40 hours My friends at Company X, with the same exact job, received a salary increase and are not experiencing so many changes, maybe it is time to make a move Some may think - I did not go to college and then come here to punch a clock While others may react differently - This is great, I am finally going to get the extra pay for all the hours I work, now I ll work more 13 Copyright 2016 Deloitte Development LLC. All rights reserved.

14 Preliminary readiness assessment findings Our readiness assessment is designed to help organizations gauge their readiness to address a number of important financial, operational, technology, and workforce impacts associated with new FLSA. Full results will be released at a later date but with over 100 responses so far, we have seen the following areas that many organizations have not yet considered: 1. Do you have a tool to easily compute the cost of various change options? 2. Have you quantified the costs of non-compliance? 3. Have you assessed how the new FLSA regulations impact your pricing structure or existing contracts and profitability? 78% 22% 76% 24% 74% 26% Yes No Yes No Yes No 4. Do you know the TOTAL cost to bring all current, exempt employees to the new salary threshold? 5. Do you have a strategy to minimize unwanted turnover during this transition? 6. Do you have a training plan in place to help transition new nonexempt workers as it pertains to compliance, scheduling, comp time, time off, and reporting their time? 69% 31% 71% 29% 68% 32% Yes No 14 Yes No Yes No Copyright 2016 Deloitte Development LLC. All rights reserved.

Data Driven Approach Will Drive Business Impact Move beyond the basic analysis of: Number of Directly Impacted Jobs and Employees Full Cost to Retain Exemption Status at

Costs Explore savings alternatives to offset added labor/systems costs Number of hours current impacted staff work and more accurate cost scenario planning Assessment of costs

Extraneous Costs Inclusion of premium pays in the regular rate Changes in costs of benefits and other rewards attached to pay; may also include state specific requirements

Costs Pay compression analysis for jobs above and below and career paths Impacts to work schedules and labor coverage, and possible redistribution of hours; also possible cost

15 Data Driven Approach Will Drive Business Impact Move beyond the basic analysis of: Number of Directly Impacted Jobs and Employees Full Cost to Retain Exemption Status at Minimum Levels Projected Costs if Jobs are Reclassified to Non Exempt Expanded, complex and more detailed analysis and scenario planning to guide strategy planning Efficiency Costs Explore savings alternatives to offset added labor/systems costs Number of hours current impacted staff work and more accurate cost scenario planning Assessment of costs on pricing structures and/or existing contracts and margins Understand cost impact of various options including projected increases by shift / operating area / location, etc. Extraneous Costs Inclusion of premium pays in the regular rate Changes in costs of benefits and other rewards attached to pay; may also include state specific requirements Possible state specific requirements such as paid breaks/meal periods Cost of updating systems such as Payroll, HRIS, reporting and timekeeping and scheduling tools Talent Costs Pay compression analysis for jobs above and below and career paths Impacts to work schedules and labor coverage, and possible redistribution of hours; also possible cost of hiring Assessment of needed updates to talent policies and tools such as job descriptions Possible changes to union status 15 Copyright 2016 Deloitte Development LLC. All rights reserved.

Employers have time to assess and act Employers have longer than expected to make changes before the effective date; begin by doing the math Identify those employees in exempt jobs that: Do not meet

17 Employers have time to assess and act Employers have longer than expected to make changes before the effective date; begin by doing the math Identify those employees in exempt jobs that: Do not meet the minimum salary test of $47,476 Do not meet the highly compensated threshold of $134,004 Examine the impacted employee population and their perception of changes Determine the compliance strategy, with the most obvious being: Accept that these are now non-exempt jobs and reclassify them; do not change pay rates, or Retain exemption status; Increase base pay to at least the minimum for those that do not meet the new standard Next, we will discuss some alternative strategies to explore beyond the obvious to mitigate cost and operational issues Copyright 2016 Deloitte Development LLC. All rights reserved.

Strategy 1: Inform Manage the change early with collaborative input Inform and engage on changes and timeline with key stakeholders C Suite Senior leaders in impacted areas Finance Human Resources

18 Strategy 1: Inform Manage the change early with collaborative input Inform and engage on changes and timeline with key stakeholders C Suite Senior leaders in impacted areas Finance Human Resources Information Technology Communications Legal Develop a Business Impact Analysis & Message Understanding FLSA Explain the scope and magnitude of change What will change and when Quantify possible impacted jobs, how many, how much and if a problem Initial thoughts on possible actions and analytical next steps We are developing a strategy to sustain our success 18 Copyright 2016 Deloitte Development LLC. All rights reserved.

Begin now Strategy 2: Understand Conduct due diligence to inform on planning; seek to understand: Your company culture and how employees might perceive this change Quantify the current state Not only

19 Begin now Strategy 2: Understand Conduct due diligence to inform on planning; seek to understand: Your company culture and how employees might perceive this change Quantify the current state Not only number of people, jobs and impacts if base pay is raised, but Understanding the hours employees in the impacted jobs are working today and in the near future, identify their workload and how it can be reallocated Responsibilities and pay practices of jobs above and below impacted roles Needs of the business; scheduling and deployment of workforce in the impacted jobs Funding quantify full cost and identify ways to minimize the financial impact and find savings in the business to help fund these added costs Assess impacted business systems for cost and planning impact 19 Copyright 2016 Deloitte Development LLC. All rights reserved.

20 Strategy 3: Design and fund Comprehensive due diligence can support alternative considerations rather than automatic shift to increasing base pay or reclassification Workforce planning Shift in hiring strategy Use of contractors cover hours Job re-design to reallocate workload and manage hours Conduct job analysis and consider work redistribution and/or headcount reduction Manage hours through shifting of duties Finding lost dollars and aligning pay to market Conduct analysis and adjust approach to pay premiums Assess payroll calculation practices; halt payroll leakage and use savings Scheduling and practices updates Redesign shifts/schedules and monitoring Develop OT approval processes Explore fluctuating workweek for select jobs 20 Copyright 2016 Deloitte Development LLC. All rights reserved.

21 Strategy 4: Deploy As we have seen, it is more than just doing the math Develop a change management process that follows the initial inform meetings Conduct a change assessment and develop a change and communications strategy Involve interdependent areas such as Finance, Legal, Information, Technology and Operations early Plan data gathering to increase credibility of analysis; this may include interviewing leadership and front line employees around hours worked Update policies to support changes Do not underestimate the depth of change; communications can help: All to understand updated policies, practices, duties associated with the change Managers understand how to manage non-exempt staff Employees understand the rationale behind the change and how to operate in the new environment; it is about managing cost and ego 21 Copyright 2016 Deloitte Development LLC. All rights reserved.

An optimization tool will produce answers quickly Pull both time and

Consider all of the variables to tailor your compliance strategy

Don t just estimate Evaluate everyone Avoid using averages Uses real data

22 An optimization tool will produce answers quickly Pull both time and payroll data to demonstrate key scenarios and quantify the impact. Consider all of the variables to tailor your compliance strategy decisions to unique business needs. Give your organization real numbers. Don t just estimate Evaluate everyone Avoid using averages Uses real data and filter down to the detail 22 Copyright 2016 Deloitte Development LLC. All rights reserved.

Outcome: Business, people & financial optimization Analyze scenarios to formulate a

planning for desired people impact Operations Issues FTE/Headcount Hours redistribution

status (halftime for overtime hours) People Issues Employee status trends modeling Pay

achieve new salary threshold ($47,476) Projected overtime and premium pay analysis for

6m 36% Estimated impact of moving 558 employees (out of ~5,000 current exempts) to Non-

Response Data analysis should form the basis to formulate strategies for: Change

23 Outcome: Business, people & financial optimization Analyze scenarios to formulate a data-driven strategy for all of the impacted, interdependent organizational areas while planning for desired people impact Operations Issues FTE/Headcount Hours redistribution for exempt/non exempt employees Cost to change impacted employees to nonexempt salaried status (halftime for overtime hours) People Issues Employee status trends modeling Pay and job code analysis by impacted employee groups Financial & Technology Issues Cost to achieve new salary threshold ($47,476) Projected overtime and premium pay analysis for exempt employees Our Optimization Findings $4.6m 36% Estimated impact of moving 558 employees (out of ~5,000 current exempts) to Non- Exempt Estimated cost savings identified through alternative scenario modelling Response Data analysis should form the basis to formulate strategies for: Change Management Training Compensation Operating Processes HR and WFM Technology Talent 23 Copyright 2016 Deloitte Development LLC. All rights reserved.

Strategy timeline can start now Employers do not have much time to become informed, analyze their situation, decide on their strategy, design their systems and processes, train, test and deploy.

24 Strategy timeline can start now Employers do not have much time to become informed, analyze their situation, decide on their strategy, design their systems and processes, train, test and deploy. ----Find your Funding/Savings---- Final Regs. Announced Assess Impact, & Plan Strategy Deploy & Test Changes Comply by Dec 1 ## Days remaining to comply 24 Copyright 2016 Deloitte Development LLC. All rights reserved.

25 Readiness Questionnaire

26 Introduction The following assessment will help you gauge your organization s readiness to address financial, operational, and workforce impacts associated with FLSA compliance. If you answer Yes to any question, you score 5 points. For every No answer, zero points are scored: Take it online any time at: Points Scored Points Scored Question Question Yes No Yes No Copyright 2016 Deloitte Development LLC. All rights reserved.

28 Q2 Have you determined the relative difference in raising wages to $47,476 versus converting impacted employees to non-exempt status? 28 Copyright 2016 Deloitte Development LLC. All rights reserved.

31 Q5 Do you know the TOTAL cost to bring all current, exempt employees to the new salary threshold? Note: Be sure to include the impact on benefits, 401k contributions, base salary, employer taxes, and other related labor expenses. 31 Copyright 2016 Deloitte Development LLC. All rights reserved.

32 Q6 Have you quantified the cost of additional premium payments and benefits when exempt employees convert to hourly? Note: Please keep in mind they must be paid premium amounts for shift differential, holiday pay, working through meals, On Call, travel pay, skill pay or other premium amounts your hourly workers are eligible for. 32 Copyright 2016 Deloitte Development LLC. All rights reserved.

33 Q7 Have you assessed the cost impact resulting from state overtime and meal break rules when exempts are converted to hourly workers? 33 Copyright 2016 Deloitte Development LLC. All rights reserved.

34 Q8 Do you have a strategy for maintaining internal equity when the impact of the new regulations will vary based on market wages in the area? 34 Copyright 2016 Deloitte Development LLC. All rights reserved.

40 Q14 Are all of your job descriptions up to date? This will be very important so that you can confirm which jobs pass one or more of the duties tests. 40 Copyright 2016 Deloitte Development LLC. All rights reserved.

41 Q15 Do you have a tool to easily compute the cost of various change options? Options include reallocating work to lower paid workers, hiring more part-time employees or by reducing exempt headcount. 41 Copyright 2016 Deloitte Development LLC. All rights reserved.

42 Q16 Have you quantified the systems impact for when salaried workers transition to hourly workers and need access to timekeeping and scheduling systems? Please also consider the subsequent costs to convert and pay for software licensing, etc. 42 Copyright 2016 Deloitte Development LLC. All rights reserved.

43 Q17 Once exempt employees convert to hourly work, will you be able to effectively manage labor coverage? Labor coverage includes backfilling where exempt workers provided coverage during absence, covering during peak hours and other scenarios where hourly workforce was once unavailable or costly 43 Copyright 2016 Deloitte Development LLC. All rights reserved.

45 Q19 Do you have a training plan in place to help transition new nonexempt workers as it pertains to compliance, scheduling, comp time, time off, and reporting their time? 45 Copyright 2016 Deloitte Development LLC. All rights reserved.

46 Q20 Do exempt employees enjoy access to benefits, privileges, pay, technologies and devices that will be revoked if their status is changed? 46 Copyright 2016 Deloitte Development LLC. All rights reserved.

47 Scoring Scoring Criteria Score of 50 and below: Not well prepared Your organization may be at significant risk of encountering unanticipated costs and issues associated with the new regulations. Score of 51 75: Fairly well prepared While you have a good understanding of some of the issues and impacts of the new FLSA regulations, your preparation could be improved. Score of 76 94: Well prepared You re clearly aware of many of the potential impacts of the new FLSA regulations on your organization, but some refinement of your analysis may yield significant cost savings. Score of : Very well prepared Congratulations, you re ready! Quit your day job and write a book to teach others 47 Copyright 2016 Deloitte Development LLC. All rights reserved.

48 Questions?

com Peter Weinberg Senior Manager HR Transformation Deloitte Consulting LLP

49 Contact Info Lisa Disselkamp Managing Director HR Transformation Deloitte Consulting LLP Peter Weinberg Senior Manager HR Transformation Deloitte Consulting LLP Copyright 2016 Deloitte Development LLC. All rights reserved.

50 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2016 Deloitte Development LLC. All rights reserved. 36 USC Member of Deloitte Touche Tohmatsu Limited

The New Overtime Rules How Will You Comply?

The New Overtime Rules How Will You Comply? Ohio Association of Child Caring Agencies September 27, 2016 Lawrence Feheley 2 We re making more workers eligible for the overtime that you ve earned. And it