The federal government's labor law update regarding overtime exemption will go into effect in less than two weeks. Are you prepared?

On May 18, 2016, President Obama and Department of Labor Secretary Perez announced the publication of the Department of Labor’s (DOL) final rule updating the overtime regulations. The updated rule will become effective on December 1, 2016 and will automatically extend overtime pay eligibility to as many as 4.2 million workers within its first year.

Companies with gross volume sales greater than $500,000 will have until December 1 to assess the impact the new rules will have on business and implement a strategy to comply with them. The rules will certainly impose new costs on businesses and require decision makers and those overseeing human resources and financials to incorporate even more analytics into their business planning.

New FLSA Rule Impact on California Employers

According the California Retailers Association, California’s retail industry currently operates over 164,200 stores with sales in excess of $571 billion annually and employing 2,776,000 people—nearly one fifth of California’s total employment.

The new overtime rules will have a significant impact on the management of this employment sector.

The National Retail Federation (NRF) released a study detailing the impact the new rules will have on the retail and restaurant industries.

With the results of the presidential election, the question arises whether the new Rule could be rescinded by the next president. Not according to Hannesson Murphy at The National Law Review,

Changing this will be somewhat more difficult than just signing a memo. For one thing, the FLSA expressly delegates power to the Department of Labor to define the specific terms of the exemptions. As a result, nothing can happen until a new Secretary of Labor is installed.

Next, the new Secretary of Labor would have to propose a new regulation to overturn the “Final Rule.” That also will take time. Meanwhile, employers having to comply with the Final Rule by December 1 – only a few weeks from now – already will have made the necessary adjustments to deal with the regulation by raising affected worker pay to come within the new minimum threshold or converting the workers to hourly.

Preparing for the December 1, 2016 Deadline

This infographic illustrates a number of the key statistics behind the Final Rule and the potential impact on employers.

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Key Points of the Final Rules

$47,476 Wage Threshold

To determine those employees who should be included in overtime pay requirements—in other words, nonexempt employees—the DOL set the new threshold at the 40th percentile of earnings of full-time salaried workers in the lowest wage Census Region, the South.

This results in a new wage exemption of $913/week ($47,476/year), a significant increase from the current rate of $455/week ($23,660/year), set in 2004.

Salaried and hourly workers paid below the threshold amount are generally eligible for overtime when they work more than 40 hours per week. However, a new provision in the FLSA allows employers to count a portion of nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent ($4,747/year) of the new standard salary level.

Exemption Tests

Employees paid above the threshold amount may be exempt from overtime pay provided their job descriptions pass “exemption tests.” To exempt an employee from overtime, FLSA regulations require employers to apply three tests in order to confirm they can be excluded:

• Salary Basis Test: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
• Salary Level Test: The amount of salary paid must meet a minimum, specified amount (under the Final Rule: $913/week, or $47,476/year).
• Duties Test: Employees must pass each prong of the test in order to satisfy the duties test. The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations. The test involves assessing the level of independent decision-making, management of business activities, direction of others’ work, specialized training and/or scope of authority involved in the day-to-day performance of work.

$500,000 Sales Threshold

The FLSA final rule applies only to employers with gross volume sales of $500,000 or more, which means some smaller HME companies may not be affected.

Tracking Hours Worked

Businesses with salaried employees who fall below the new exempt salary threshold will now be required to have a time-tracking system in place that accurately records work hours. This will provide documentation and protect against FLSA violations. No specific method for time tracking is mandated; however, the system used “must be accurate and correctly account hours for regular and overtime pay.”

Reclassifying Employees

Employers will need to examine employee compensation and determine who is affected. HR strategies for managing the changes should be developed so that your business is prepared for the changes by December 1.

The types of HME workers affected by these regulations will vary for every business, but many will fall under a general descriptor of “lead,” “manager” or “supervisor” with common title examples such as:

• Warehouse/distribution manager
• Billing/reimbursement manager
• Lead customer service representative
• Retail manager
• Purchasing manager
• Operations manager

The Challenge is for Businesses With Many Low-Threshold Exempt Workers

Employers will need to educate themselves or avail themselves of the professional assistance and resources that are currently available to them. 

Before the Final Rule goes into effect on December 1st, employers should assess which employees will be affected, and how the employer will want to respond. One approach would be to raise the salaries and compensation of these employees to meet the new salary/compensation thresholds.

This course of action may impose not only direct costs, but also indirect costs by creating pressure to raise salaries for other employees higher up on the organizational chart, or causing disgruntlement for those employees if the salary differential is reduced.

Another approach would be to re-classify exempt employees as non-exempt and pay them overtime in accordance with the FLSA. To control costs associated with this approach, employers may be tempted to limit hours of non-exempt employees to 40 per week, or even consider reducing hourly rates to offset their expected future overtime earnings.

Getting Expert Help to Stay Up to Date and In Compliance

An updated payroll compliance strategy will help your organization meet its obligations, while providing accuracy and timeliness. So take time to understand the laws, prioritize employee and manager salary changes, and maintain accurate record keeping. In this way, you will make compliance a sure thing.

Another key step in maintaining HR compliance and increasing your company's cost-effectiveness is to consider outsourcing. A professional payroll management and workforce solutions provider such as Accuchex can offer much-needed help with Human Resources needs and questions.

Accuchex is a full spectrum Payroll Management Services provider offering expertise in Time Management, Insurance and Retirement issues, as well.