New Department of Labor Overtime Rules: Are You Ready? September 29, 2016 Katie Welch, M.A., SPHR BeachFleischman

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1 New Department of Labor Overtime Rules: Are You Ready? September 29, 2016 Katie Welch, M.A., SPHR BeachFleischman

2 Topics Background Information Final Overtime Rule Overview What Does This Mean for You? Options for Employers Considerations for Employees Being Reclassified Strategies for Communicating with Employees Questions

3 A Brief History Since 1940, the DOL s regulations have required three exemption tests to be met; salary basis test, salary level test, and duties test 2004: DOL updated regulations to $455 per week ($23,660 annually), collapsed the duties test into a single standard test, and added the HCE exemption 2014: President Obama directed the DOL to update and modernize the regulations July 6, 2015: DOL published a notice of rulemaking on July 6, 2015 and received over 270,000 comments May 18, 2016: DOL announced that it will publish a Final Rule to update the regulations. New rule is effective December 1, 2016.

4 Goals and Concerns Goals: Raise middle-class wages Increase the number of nonexempt workers Provide bargaining power to low-wage workers who do not have certain protections Simplify the identification of overtime-eligible employees Concerns: Potential for unintended consequences (e.g., lowering base wages to offset regulations, moving employees to part-time roles) Rule doesn t guarantee that new, nonexempt employees will earn overtime pay Automatic updates every three years, starting January 1, 2020 Source: WorldatWork

5 FLSA Classifications Exempt Position passes the duties test for exemption AND salary threshold Employees are exempt from overtime, regardless of how many hours they work Paid on a salaried basis Employers bear the burden of proving that you have correctly classified a position as exempt Nonexempt Position does not pass the duties test or salary threshold Employers must pay them one-and-ahalf times their regular rate of pay when they work more than 40 hours in a week Can be paid on a salaried or hourly basis Review job descriptions to confirm position is classified correctly as exempt or non-exempt.

6 Nondiscretionary vs. Discretionary Bonuses Nondiscretionary Bonus The employer predetermines the specific criteria that is required to receive a bonus Employees expect to earn a bonus if they meet the criteria Examples include additional compensation for exceeding performance or productivity goals Can be applied up to 10% of the new salary level ($4,747.60), as long as it is paid quarterly Discretionary Bonus At the sole discretion of the employer to award it, not an expectation by employees The amount, requirements, timing, and announcement of the bonus is not disclosed in advance Examples include awarding a bonus for reaching company/financial goals, a holiday bonus, or a spot bonus

7 Final Overtime Rule Salary Threshold Standard salary level threshold increased to $47,476 per year ($913 per week) 40 th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (the South) New Highly Compensated Employees (HCE) salary threshold is $134,004 annually 90 th percentile of full-time salaried workers nationally Employers can apply nondiscretionary bonuses and incentive payments (commissions) up to 10% of the new salary threshold Payments must be made on at least a quarterly basis

8 Automatic Updates Starting January 1, 2020, the standard salary level threshold and the HCE threshold will begin automatically updating every three years The Department of Labor will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019

9 What Is Not Changing The regulatory text for primary duty Standard duties test Duties tests for executive, administrative, or professional employees The compensation standards to doctors, lawyers, teachers, or outside sales employees The computer professional exemption Guidelines for blue collar workers, police, fire fighters, paramedics, and other first responders

10 Executive Exemption Duties To qualify for the executive exemption: The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $913 per week; Primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; Must customarily and regularly direct the work of at least two or more other fulltime employees or their equivalent; and Must have the authority to hire or fire other employees, or the employee s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. Source: DOL Fact Sheet #17A

11 Administrative Exemption Duties To qualify for the administrative exemption: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week; Primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer s customers; and The employee s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Source: DOL Fact Sheet #17A

12 Professional Exemption To qualify for the professional exemption: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week; Primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; Advanced knowledge must be in a field of science or learning; and Advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. Source: DOL Fact Sheet #17A

13 Professional Exemption Key Terms Work Requiring Advanced Knowledge Work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment Distinguished from work involving routine mental, manual, mechanical or physical work. Generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level. Field of Science or Learning Includes law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, or pharmacy Other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning. Source: DOL Fact Sheet #17A

14 Computer Exemption To qualify for the computer exemption: The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour; The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; The employee s primary duty must consist of: 1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; 2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; 3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or 4. A combination of the aforementioned duties, the performance of which requires the same level of skills. Source: DOL Fact Sheet #17A

15 Next Steps Ensure you have up-to-date job descriptions for each position; review FLSA classifications to ensure they are correct Review compensation data of exempt employees Create a spreadsheet of all exempt employees with the following fields: Job title Current salary Hourly rate (based on 2,080 hours) Actual or estimated hours worked in a typical workweek Current bonus/incentive/commission amounts (if any) For exempt employees who are currently below $47,476, calculate the pay increase required to meet the new threshold

16 Considerations

17 Considerations, cont. Increase in Costs Raise pay to meet new salary level and maintain exemption Re-classify to nonexempt with no base pay reduction and no decrease in hours worked Re-classify to nonexempt with no base pay reduction, limit hours worked to 40, add staff Add bonus/incentive if currently not eligible (can use up to $4,747 towards salary) Combination of above Other Cost-Neutral Re-classify to nonexempt, limit hours to 40, increase productivity Re-classify to nonexempt, reduce base pay, limit hours to 40, add staff Re-classify to nonexempt, reduce base pay to offset overtime expense If currently eligible for bonus/incentive, reduce or eliminate to offset overtime expense Combination of above Other Source: WorldatWork

18 Implications Exempt duties of impacted employees who will do those in the future? Move duties to next level up (manager)? Maintain duties with the nonexempt employee? Compensation ranges/pay compression Part-time exempt employees harder to meet threshold Having both exempt and nonexempt employees in the same job? Administrative and morale implications Source: WorldatWork

19 Effective Change Management Start planning now Establish a process and timeline for the review and implementation of changes Create employee communication materials to support changes Messaging Vehicles (meetings, FAQ s, etc.) Training policies on timekeeping and overtime Recording time worked Rules for overtime, time not worked, time not allowed to work Treat leaders as a special audience communicate to them first and ensure they are trained on new policies/procedures

20 December 1 Will Be Here Soon: Don t wait until the last minute!

21 Paying the Penalty for Wage and Hour Violations Payment of back wages The Secretary of Labor may bring suit for back wages and an equal amount as liquidated damages An employee may file a private suit for back pay and an equal amount as liquidated damages, plus attorney's fees and court costs Two-year statute of limitations; three years in the case of a willful violation When employers are found to willfully violate FLSA, they can also face criminal prosecution and fines up to $10,000. Upon a second conviction, employers could face imprisonment. Source: Department of Labor

22 QUESTIONS?

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