The New FLSA Overtime Rules Do Not Have to Mean Higher Wage Costs

Update…  11/23/2016.  Yesterday, a Federal court in Texas put a temporary injunction on the new law. 21 states had been contesting the bill, which was consolidated into a single suit claiming the Department of Labor did not have the authority to make this large change. This action doesn’t reverse law, but only puts the implementation date on hold while the court has the chance to hear the case and make their decision. While we wait for that decision, it is an opportunity to consider your options and implementation plan should the law go into effect.

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When employees work over 40 hours in a week, Federal law requires that they be paid an over-time rate of 1.5 times their regular pay rate… unless they are “exempt”. Whether an employee is classified as exempt or nonexempt is based on the Fair Labor Standards Act’s (“FLSA”) three-part test: 1) Salary Basis, 2) Salary Level and 3) Job Duties.

Beginning December 1, 2016, the FLSA’s new rules change the “Salary Level” test from $23,660 or more to $47,476 or more. It is estimated that 4 million employees in the U.S. that were previously exempt under the prior rules will now be nonexempt and subject to overtime rules.

What should you do if you have salaried employees below the $47,476 threshold? There are really only two options:

First, you can retain the employee’s exempt status by increasing their salary to the new threshold. This is probably only a viable option if their current salary is already approaching the new minimum salary level and you make the adjustment in conjunction with their 2016 end-of-year review. For most businesses that find themselves in this position, large salary hikes are not a costly option.

The other option is to accept these employees’ new nonexempt classification and pay them an hourly rate.  The real management key is in executing this second step. Overtime hours will have to be more closely managed. Additional hours for these newly reclassified employees now comes with a new incremental cost. Efficiency and performance measures will need to be expanded to include more supervisors and management positions.

Some businesses will try to reduce or limit the number of overtime hours performed by these newly reclassified nonexempt employees. Hiring additional employees may be an option for some businesses, however the nature of these overtime tasks may require experience and supervisory skills. The easiest short term solution is to plan on the existing employees to work the same number of overtime hours and to adjust their new hourly rate accordingly.

Even with paying overtime, the new FLSA rules does not have to mean higher overall wage costs. If the overtime work is to be performed by these same newly classified employees, consider carefully how you will compute their new hourly pay rate. Include an estimate of the number of their overtime hours and an adjustment for the higher overtime rate when computing their new hourly rate.

For example, if under prior FLSA rules your employee had a salary of $32,000 salaried employee with an average of one overtime hour per workday, the new hourly wage rate would be $13.10.

To make this computation, the appropriate denominator has to be first computed:

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The new rate is then computed by taking the old salary divided by the denominator:

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To proof the rate computation, we apply the new rate and overtime rate to the estimated hours:

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Along with this change is the need for greater accounting and compliance. Time worked for all hourly employees needs to be tracked and adequate records maintained. This is a FLSA requirement (as well as IRS and state labor departments), and it is reasonable to expect an increased interest in documentation to support wage payments. Make sure your policies and procedures reflect the law, and seek legal advice if needed.

If addressed properly, the new FLSA rules are manageable and their financial impact to your business can be minimal.

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