The US Dept. of Labor released the final new rules on Fair Labor Standards Act (FLSA) overtime standards today. The much anticipated ruling has been a buzz amongst HR professionals since the draft was released almost a year ago. While many of us have been talking about it behind closed doors, now that the ruling is official, it’s making a much more public splash on the Today Show and NPR, to name a few. In many cases, employees are learning about the ruling from the media first. Given that, we’ve put together the cliff notes version of the ruling, as well as what to look out for as you begin to ensure compliance* in your organization.
Details of the ruling.
- The salary floor for FLSA exemptions was raised to $913 per week; $47,476 annually. It was previously $455 week; $23,660 annually. The new floor is actually lower than the originally proposed $50,440 annually. What does this mean? There are two groups of things that can classify a job as exempt: the job passes appropriate exemption tests and the employees in the job earn a salary above the salary floor. So there may be employees in jobs that pass the exemption tests, but whose salary does not exceed the salary floor. Under the new ruling, those employees would be reclassified as non-exempt and then subject to the overtime, meal and rest breaks, and other protections in the FLSA.
- The effective date is December 1, 2016. That means you’ll need to ensure compliance in a little more than six months from today. This is actually fairly generous. In addition to being in discussion for a while, the DOL gave organizations more time to implement changes than is required by law, which is just 60 days.
- The salary level will be re-evaluated automatically every 3 years and adjusted as necessary to maintain percentile standings. This differs from the original draft, which had the evaluation occurring annually. Essentially, this ruling lays the groundwork for continual updating of the salary floor.
Things to watch for.
There are a couple ways that companies plan to address the changes to the FLSA salary floor. Some will reclassify employees whose pay falls shy of the $47,476 annual threshold as non-exempt workers, choosing to pay those workers appropriate overtime wages, as well as ensure meal and rest breaks. If you decide to do this:
- Communicate changes to employees. At this point you’ll be providing reactionary communication given that the media started the messaging for you. You may have to start by explaining at a very basic level what exemption means. Some employees will welcome the potential to earn overtime. Some will be concerned about the perceived loss of flexibility or organizational status that seems linked to the “non-exempt” designation. Think about how you can minimize those concerns by retaining flexibility and status, while ensuring compliance at the same time.
- Communicate changes to managers then provide training for your managers about how to manage non-exempt employees.
- Remember and plan for the administrative burden that comes with tracking and paying non-exempt employees, even if you do continue to pay non-exempt employees on a salary basis. Make sure you update your policies and processes to reflect the new ruling.
Some organizations will decide instead to raise the pay for employees whose jobs pass the exemption tests to the new minimum annual salary. Once the pay is above the salary floor, and the job passes the exemption tests, the employee can continue to be classified as exempt. If you decide to do this:
- Watch for compression issues between jobs. If you have shift leads that are exempt, for example, and you decide to bump their pay, how close does that put the shift lead pay to the manager pay in the same job family? Look out for the potential ripple effect.
- Decide on your appropriate communication to employees. With the buzz in the media about the ruling, your exempt employees who are right on the salary line may suddenly realize that they’re not earning overtime pay. Be prepared with talking points about the benefit or trade-off in your organization.
For more information:
- There has been some controversy about this ruling. For some good reading about the impact of the ruling, SHRM has put together a resource center.
- ADP has put together a calculator to help identify whether it is more cost efficient to raise the pay of someone whose job passes the exemption tests to the salary floor, or to continue to pay them at their current rate and pay overtime.
One last word to the wise: don’t skimp on the communication. It’s starting to look like the impact of the communication may be bigger than the impact of the actual ruling itself! Use this as an opportunity to have productive conversations about both compensation and your employees’ goals and interests in the organization.
* If you have questions or concerns about how to classify your employees, please consult an employment lawyer. The information provided is for informational purposes only. Although every reasonable effort is made to present current and accurate information, PayScale makes no guarantees of any kind and cannot be held liable for any outdated or incorrect information.