In order to help finance prepare for FLSA (Fair Labor Standards Act) changes to the overtime rules that came down in May, CFOs and their finance teams will need to educate themselves about the regulatory scope and labor cost of those big changes. Then, finance leaders will need to coordinate closely with HR to both ensure compliance and manage cost control issues that will arise before and after the rule changes take effect on December 1, 2016.
As that collaboration takes place, here's what CFOs should be prioritizing:
1. Know the Scope of the FLSA Overtime Rules Changes
As a result of the Overtime changes, 4.2 million more U.S. workers will be classified as non-exempt, meaning that they'll be eligible for overtime and their hours must be tracked. Under the new overtime rule, the salary threshold for the executive, administrative and professional employee exemptions was increased from $23,660 per year to $47,476 per year ($913 per week). The salary threshold for highly compensated employees was also increased from $100,000 per year to $134,004 annually. But the Department of Labor (DOL) made no change to the duties test.
In another big rule change, the DOL will allow employers to use non-discretionary compensation to help satisfy the standard salary level. Thus, employers may use non-discretionary bonuses, defined as those promised in advance, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement for exempt employees, as long as those forms of compensation are paid at least quarterly.
2. Understand the Need to Re-Classify Employees
Obviously the costs you experience as a result of the regulatory changes will depend on the number of affected employees you have, and how you ultimately decide to manage the changes to balance compliance and cost control issues. You will most likely end up with more non-exempt employees, who qualify for overtime, and fewer non-exempt employees. HR leadership, working closely with your finance team, will need to initiate a meticulous process of employee re-classification in order to comply with the rule changes. Obviously, no changes will be needed for employees already classified as non-exempt.
However, for employees now classified as exempt, and meeting the duties test, you'll need to make a list of those who fall between the $23,660 and $47,476 annual salary range. Those are your affected employees. You now have two choices, both of which will have a potentially significant financial impact: (1) you can re-classify the employee as non-exempt, start tracking time and pay overtime; or (2) you can increase the employee's salary above the salary threshold and continue classifying them as exempt.
3. Estimate the Impact on Labor Costs
In order to assess your cost impact, you should begin to monitor and estimate the additional overtime costs you'll be incurring from reclassifying more employees as non-exempt. You'll probably need to invest more resources to timekeeping systems, which will be tracking many more employees and involve more potential financial risk.
To determine your costs, there are number of useful tools to facilitate the process. For example, an online FLSA Overtime Calculator can help you measure the exact impact the new FLSA overtime rule changes will have on your business. The calculator asks you to input whether you've chosen to (1) pay overtime to newly non-exempt employees or (2) increased salaries to maintain exempt status. It includes non-discretionary compensation (bonus, commissions, etc.) in the calculations and includes other necessary factors in determining your ultimate labor costs for either an individual employee or for the entire organization.
4. Consider Needed Investments in Timekeeping and Human Capital Management (HCM)
In addition, finance and HR should be collaborating to develop human capital management (HCM) strategies and tools to optimize labor costs and maximize workforce efficiency, while managing these big employee-related changes. For example, communicating status changes to employees must be done carefully, as should orienting many more non-exempt employees to time-tracking procedures. In a regulatory landscape of heightened complexity and financial risk, engaging your people remains a top priority for growing your business, so that stage of the process is as vital as the aforementioned calculations — if not more so.
Although finance and HR have until December 1 to be ready to comply with the new FLSA overtime rule changes, now is the time to develop a collaborative strategy for complying with the changes and controlling overtime costs in your organization. By following the four steps listed above, you'll be in a much better position to fully understand the final FLSA changes, ensure compliance, continue to engage your most valuable resources (employees) and protect your bottom line.
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