New Overtime Rules: Now What and How Do You Tell Your Employees?
Written by Jennifer Givens
After two years of debate, the U.S. Department of Labor (DOL) officially published the new overtime regulations of the Fair Labor Standards Act. The new rules increase the salary exemption threshold to the Executive, Administrative, and Professional classifications from $455 per week ($23,660 annually) to $913 per week ($47,476 annually), with the threshold set to automatically update every three years. The Highly Compensated Employee threshold also increases moving from $100,000 to $134,004. Employers must be in compliance by December 1, 2016.
Consider this four-step plan to determine how the regulation impacts your company and what actions you should take.
1. Understand the details
Evaluate who will be affected
The changes apply only to the "white-collar exemptions": Executive, Administrative, and Professional. If an employee is exempt under a different category, this rule does not apply.
Assess the new minimum salary level
For exempt employees who fall below the new salary threshold, there are two options:
• Increase the annual pay of all exempt employees earning under $47,476, or
• Re-classify these employees to a non-exempt classification
- If an employee is reclassified, the employer must pay 1.5 times the normal wages for any time worked over 40 hours in a work week.
Keep in mind, nondiscretionary bonuses, incentive payments, and commissions can satisfy up to 10% of the minimum salary threshold. However, there are some stipulations for such payments to count toward the minimum salary requirement.
Employees can be paid at 90% of the minimum salary level, $821.70 week ($42,728.40 annually), but the employer must guarantee at least quarterly bonus/incentives/commission payments that raise pay above the $47,476 annual threshold.
In order to be in compliance with the exemption status rule, employers must acknowledge and pay the employee for any salary shortfalls that could occur (such as, an employee leaving prior to the quarterly bonus/incentives/commission payment.)
Review minimum salary levels periodically
The DOL will update salary thresholds automatically every three years, and will provide notice no less than 150 days before the January 1st effective date of these changes.
|Salary thresholds will be set at the 40th percentile of full-time non-hourly paid employees in the lowest wage Census Region and 90th percentile of full-time non-hourly paid employees nationwide.|
2. Determine the cost impact
Calculate the cost to your organization to bring Executive, Administrative and Professional exempt employees up to $47,476. Be sure to consider all aspects of compensation and benefits when calculating costs. An increase in pay will affect payroll taxes, 401(k) matches, healthcare and benefits costs.
Alternatively, calculate the impact of keeping salaries where they are, but reclassifying employees and paying overtime. Compare the results of these two calculations to determine the difference in cost between reclassifying employees to non-exempt status and increasing pay to the new exempt employee threshold.
3. Identify areas of impact and create an action plan
The new overtime regulation will impact several areas within a company. It is important to bring together all key stakeholders and discuss the implications to each group. Areas of impact to consider are:
• Compensation: Are all jobs correctly classified and pay rates compliant with regulations?
• Benefits: Will a change in classification impact benefits that are given to employees?
• Pension: Is there an impact on pensionable earnings?
• Information Technology: Do we have a timekeeping system in place?
• Training: How will managers and employees be trained on the timekeeping system? What type of education is needed for tracking employee hours?
• Payroll: What impacts are there to payroll?
Changes might be small in each area but it is important to understand the overall impact. Consider how to control costs and manage workflows with this type of change. Work may need to be shifted to control schedules of newly classified employees – without overloading those who remain exempt.
For some companies, reclassification can affect employee eligibility for various benefits. Employers should re-evaluate their compensation and benefit plans, policies, and processes. Now is the time to assess:
• Should the company be paying incentive compensation?
• Should there be changes to any benefits?
• How will breaks, travel time, timekeeping, and use of mobile devices after normal work hours be handled? What policies are needed to address these considerations?
Identifying these types of questions will help guide decision-makers to solutions. Once a plan is in place, the last step is vital: communication.
4. Communicate: again and again
A communication plan is essential for a change that impacts something as personal as employee classification and pay. You may want to share with employees:
• What the new rule is
• How the employer will address it
• How it will impact the individual employee
All levels of managers will need to understand how each of their employees is impacted. Reclassifying employees from exempt to non-exempt could be viewed negatively by some employees. Employees who are reclassified to non-exempt may also lose flexibility as they are required to track their time in a new way.
Once you have determined the direction you will take, create a communication strategy that aligns your management team and workforce with long-term business objectives and help employees understand what's happening.
Conduct a stakeholders analysis. Which employee groups are directly impacted? Which are indirectly impacted (managers, supervisors, etc.)? You may want to talk to a few "go to" employees who are directly impacted and hear their thoughts about the change firsthand. Analyze results and determine the best way to proceed.
Assemble a team within the organization to develop the communication plan and address these questions:
• What is the most effective way to reach employees?
• How will you prepare managers and supervisors to provide answers and support?
• What type of communications does the company need?
• Do materials need to be personalized or customized based on different situations?
Draft your communication deliverables with clear, short, and easy-to-understand language. Tell employees how they will be affected, when, and why. Prepare a variety of ways to reach employees such as a face-to-face meeting, e-mail, letter to home, or payroll stuffer. Consider providing manager talking points and FAQs to prepare leaders who need to support their direct reports.
Keep the communication channels open by revising or repeating key messages and providing places to direct questions and find answers. This change is significant, and it will take time for all impacted employees to understand and adjust to the change.
The December 1, 2016 compliance deadline is right around the corner, and there are many questions to consider. There's no single "best approach" for this change. Every organization is different and will need to determine the best approach based on their culture.
Need help with compensation modeling or communication strategy? Our Human Capital consultants can help you prepare for all aspects of this change and support implementation efforts.