Understanding the Proposed Department of Labor Overtime Law Presented by
OVERVIEW The Department of Labor (DOL) released a proposed rule on July 6, 2015 that, if enacted, will significantly change the existing regulations governing which white collar workers are entitled to the Fair Labor Standards Act s minimum wage and overtime pay protections. The proposed rule would change the salary level threshold that is required to classify an employee as exempt from the Fair Labor Standards Act s (FLSA) minimum wage and overtime pay requirements. 2
POTENTIAL IMPACT The proposed threshold that would qualify workers for overtime exemption would increase more than 100% from $455/week ($23,600/ year) to $970/week ($50,440/year). Current threshold Proposed threshold $23,600 $23,600 $50,440 If this goes into effect, the DOL estimates that 4.6 million workers who are exempt under the current regulations would (without employer intervention) become entitled to overtime pay in the first year. For many employers, this means there is work to be done, including: Reclassifying employees Calculating and tracking hours Adjusting wages Updating time and labor tracking systems Communication plans to the workforce and more! 3
IF THIS PROPOSED RULE GOES INTO EFFECT IN 2016, WILL YOUR COMPANY BE PREPARED? This guide will help employers like you understand: Fair Labor Standards Act, the proposed Department of Labor (DOL) overtime regulation, and what it means to you How to identify employees who will be impacted by the legislation Options for becoming compliant 4
UNDERSTANDING FLSA The Fair Labor Standards Act (FLSA) is a federal law that establishes certain labor standards, which includes minimum wage and overtime pay for certain employees. 5
UNDERSTANDING FLSA When employees are covered by this law, they are nonexempt. This means their employer is required to pay them a minimum wage, as well as an overtime wage equal to one and a half times the employee s rate of pay for any hours worked over 40 hours per week. 48 hours = 40 hrs @ hourly rate 8 hrs @ 1½ times hourly rate When workers are not covered by this law, they are considered exempt. Under current regulations, these white collar employee positions (executive, administrative, and professional employees) are not entitled to (or, they are exempt from) overtime wages when their weekly wages are above the established salary threshold of $455 per week ($23,660 per year). 48 hours = Established salary, regardless of hours worked 6
PROPOSED LEGISLATION The DOL s proposed rule (Official name: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees ) has key provisions that are targeted to increase the compensation levels needed in order for white collar employees to be classified as exempt. Specifically: 1. Setting the standard salary level required for exemption at the 40th percentile of weekly earnings for full-time salaried workers (projected to be $970 per week in 2016, or $50,440 annually). 2. Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually); and 3. Establish a mechanism for automatically updating the salary and compensation levels going forward. 7
WHY WAS THIS PROPOSAL MADE? The FLSA was enacted in 1938, establishing: A national minimum wage A forty-hour work week Child labor laws And, overtime regulation While the act currently guarantees time-and-a-half pay for hours worked over 40 per week in certain jobs, the current threshold to qualify for overtime pay ($23,600) is considered by some to be outdated, as it sits below the poverty line.* $24,300 Poverty line $23,600 Overtime threshold *For a family of four 8
WHEN CAN I EXPECT CHANGES TO TAKE PLACE? The DOL anticipated having the final rule in place to be effective in the beginning of 2016; however, this appears to be delayed, and no official announcement has been made by the DOL on when a final rule can be expected. The recently released Fall 2015 Agency Rule List for the DOL, by the Office of Management & Budget has the final rule timetable slated for July 2016. This means that the final rule could be enacted in a few short months. 9
WHAT DOES THIS MEAN FOR EMPLOYERS? BE PREPARED! The delay of the final rule allows employers to start becoming familiar with the proposed changes and how they may impact your business and staff. Planning ahead will ensure you and your business are ready for the transition and changes when/if the final rule is enacted. The new law could bring about several changes, but Human Capital Management software solutions - like Paylocity s - can help. By identifying employees who will be impacted by the law and understanding your options for becoming compliant, you can then use Paylocity tools to help simplify the updates to your workforce and payroll management. 10
HOW TO APPROACH THE PROPOSED LEGISLATION 1 Identify exempt employees who make less than $50,440 per year. It is important to understand that this new rule could affect salaried exempt employees making less than $50,440. Identifying the number of impacted employees and what types of roles could be impacted will help you understand your next steps. This can be easily done in Paylocity s WebPay, using the Report Writer tool. Please refer to page 21 in this document for steps on how to pull this report. 11
HOW TO APPROACH THE PROPOSED LEGISLATION 2 Determine the hours these employees work during an average work week. After you have created a list of exempt employees who earn less than a $50,440 per year, the next step is determining their weekly hours worked. If they work over 40 hours every week or even just some weeks, they will be eligible for overtime pay. Many exempt, salaried employees do not track their hours, nor do their employers. If you do not currently track the hours of the identified employees on your list, you should begin doing so today. Having a record of these hours will aid in ensuring you are complying with the regulation and paying employees what they are entitled. Paylocity s comprehensive solution, Web Time, ensures accuracy and accountability in time and labor management. 12
HOW TO APPROACH THE PROPOSED LEGISLATION 3 Calculate their current hourly rates. Exempt, salaried employees do not actually currently make an hourly rate. However, understanding current hourly and yearly labor costs will aid you in managing future labor costs under the new legislation. Knowing your employees current hourly rate is the first step toward calculating their future compensation. This first step is simple: Current salary divided by 52 weeks, then divided by their weekly hours worked. For example: Chris: Mallory: Roderick: ($40,000 salary / 52 weeks) / 50 hours a week = $15.38 an hour ($35,000 salary / 52 weeks) / 48 hours a week = $14.02 an hour ($29,000 salary / 52 weeks) / 45 hours a week = $12.39 an hour 13
HOW TO APPROACH THE PROPOSED LEGISLATION 4 Calculate their new annual pay under the new law. After having a thorough list of your exempt, salaried employees who make under $50,440 and knowing what their current hourly rate is, you ll need to now calculate what their new annual pay would be. Remember that the overtime rate (OT rate) is 1½ times the hourly rate. Using the same example as before: [(Hourly rate x 40 hours) + (OT rate x # of OT hours per week)] x 52 weeks = New annual pay Chris: Mallory: Roderick: ($15.38/hr x 40 hrs) + ($23.07/hr x 10 hrs) x 52 weeks = $43,986.80 yearly ($14.02/hr x 40 hrs) + ($21.03/hr x 8 hrs) x 52 weeks = $37,910.08 yearly ($12.39/hr x 40 hrs) + ($18.59/hr x 5 hrs) x 52 weeks = $30,604.60 yearly For these three employees alone, this amounts to over $11,000 in new wages paid out annually. 14
UNDERSTANDING YOUR OPTIONS Once you have identified what your employees are currently making vs. what they would be making under the new law, you must evaluate your next course of action to become compliant. There are essentially a handful of options before you (some listed below), each of them effecting labor and/or costs. What works for your company may not work for others, so it is important to weigh factors such as employment needs, headcount, and wages allocated. Reclassify employees from salaried to hourly without adjusted wages or hours Reclassify employees from salaried to hourly with adjusted wages Increase salary to $50,440, no need to record hours or pay OT Reclassify employees from salaried to hourly, do not allow employees to work OT 15
Reclassify employees from salaried to hourly, without adjusted wages or hours With this option, all employers need to do is change the employee s status (exempt to nonexempt) and use their current hourly rate. The employee will continue to work the same hours, with some of those hours qualifying for overtime pay. While this is an easier method, the employer will incur additional wage costs since the employee will now be making overtime rates after they reach 40 hours per week. 16
Reclassify employees from salaried to hourly with adjusted wage With this option, the hourly rate will be adjusted with the overtime hours in mind. The annual pay will not change, but the employee s current hourly rate will decrease in order to allow for overtime pay. With Chris s example: Chris makes $40,000 a year, or $769.23 a week, while working 50 hours a week. To keep his salary close to $40,000/year, the company must adjust his hourly rate (since he will become an hourly, nonexempt employee) in order to maintain his salary and have him continue to work 50 hours per week. Chris s rate would adjust to $13.99/hr (from $15.38/hr). He will still work 50 hours a week and he will still bring home $40,000 annually. He will, however, be eligible for overtime pay and any hours over 50 hours per week will earn him over his expected yearly income. 17
Increase salary to $50,440, no need to record hours or pay OT With this option, employers will simply increase the employee s salary to at least $50,440 so they can remain an exempt, salaried employee. There will be no need to track hours, as the employee will not be eligible for overtime pay. Reclassify employees from salaried to hourly, do not allow employees to work OT With this option, employees will become nonexempt hourly workers, meaning they will be eligible for overtime pay. However, employers will tell employees that they should never work any hours over 40 hours a week. Wages may stay the same or decrease, depending on if the hourly rate is adjusted. Either way, labor is lost since employees will no longer work overtime. 18
CONCLUSION There are clearly administrative, cost, and labor implications with each option. Work hours and productivity may be lost in the effort to stabilize wages. Or, productivity will remain the same, but wage costs could increase. Or neither could change, but the level of work needed to ensure compliance up may be challenging. What is important to understand is that none of these options are right or wrong. You simply have to understand your organization s priorities and how they fit under the new law. Other steps you can take to be prepared: Assign an employee or a team to dive in to the financial and labor implications of the new legislation Prepare a communications plan to employees. This includes announcing the changes company-wide as well as knowing how to talk through wage and/or hour adjustments with impacted employees. Check back with the Department of Labor from time to time to educate yourself proposed laws. Reach out to Paylocity with any questions on how our solutions can assist you with preparation. 19
HOW TO ACCESS EXEMPT EMPLOYEE LISTS IN PAYLOCITY WEBPAY 1. After logging into WebPay, select Reports & Analytics > Reporting Dashboard 2. Select Reports Library from the top navigation 20
3. In the Name field, type in Employee Listing. 4. Click the blue Search button. Once the list shows up, click on the Employee Listing link under Name 21
5. Setup your report and corresponding fields Output Type: Select either Excel option (based on what version you have on your computer) Employee Status: Select all except Terminated Pay Type: Select Salary If you would like to filter to certain groups in your organization, you may select additional filters such as Supervisor, Division, Branch, Department, and more 6. Click Save & Run Report. 22
7. A green bar will appear on the top of the screen that says your report has queued successfully. Once you see this, choose User Requested from the Reports & Analytics dropdown on the top navigation. 23
8. Select the report you just ran from the list. It should appear at the top. (Give the report a minute or two to generate. If the report is not yet ready, the title will appear in grey. When it is ready, it will appear as a blue hyperlink.) 24
9. Your report will automatically download, showing all the fields you selected when setting up the report. The hourly rate of the employee will be listed under Rate/Salary and their pay frequency will be listed under Pay Freq. It is important to note that this is showing their weekly or biweekly payout, when calculating their hourly rate (are you dividing this rate by 1 week s worth of hours, or 2 weeks worth of hours?). SAMPLE 25
ABOUT PAYLOCITY Paylocity is a provider of cloud-based payroll and human capital management, or HCM, software solutions for medium-sized organizations. Paylocity s comprehensive and easy-to-use solutions enable its clients to manage their workforces more effectively. Paylocity s solutions help drive strategic human capital decision-making and improve employee engagement by enhancing the human resource, payroll and finance capabilities of its clients. For more information, visit www.paylocity.com. This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor. 26