The revised Fair Labor Standards Act (FLSA) overtime rules could have a big effect on a vast array of American enterprises and their employees. The Department of Labor (DOL) estimates that an additional 4.2 million U.S. employees will now be eligible for overtime. For CFOs, that means new budgetary and compliance considerations.
The biggest change will boost the salary threshold for exempt employees (those not eligible for overtime pay) from $23,660 to $47,476 per year. That means anyone making less than the new threshold will be eligible for overtime pay as of December 1, 2016. The rules also stipulate that the threshold for highly compensated employees will be bumped up from $100,000 per year to $134,004 per year, and it will raise "wages by an estimated $12 billion over the next 10 years, with an average increase of $1.2 billion annually," according to a brief from the White House.
According to CFO Daily News, the increase "was higher than most experts predicted the new threshold would be over the last few months," so some organizations may find themselves scrambling to make the necessary adaptations.
Impact of the FLSA Rule Changes
So how can you determine your new overtime and compensation costs? To start, you'll need payroll to do some deep analysis to find out how many of your exempt employees earn less than $47,476 annually. Once you have established which of your employees will be affected by the ruling, it could make sense to simply bump up some of those salaries that fall just the below the salary threshold to above the threshold, to keep those employees exempt, obviating the need to reclassify an employee. Such a move might be cost-neutral if you consider the additional timekeeping costs and convert some employee benefit costs into salary.
It will still be vital to include HR and your payroll and benefits vendors to ensure that no stone is left unturned while working to complete the FLSA compliance requirements. Your HR leaders will also be good resources to help assess the emotional tenor of your employees as you determine who will be transitioned. Some employees may resent being moved from salaried, exempt status to time-tracking, hourly non-exempt status as a result of the new overtime rules and vice-versa.
FLSA Changes as Potential Budget Busters
An additional aspect of the new FLSA overtime rules is the possibility that they will alter your compensation budget projections. Your finance team will need to analyze carefully how much the new FLSA rules will cost your organization, and thus how much budgetary maneuvering will be necessary.
Not only will you have to find additional money to cover any overages related to additional compensation costs, but benefits and your benefits-related budget will likely be affected, as well. If, for example, you move employees from exempt benefits packages to non-exempt ones, the level of benefits will be based upon the time the employee works rather than on a fixed number of hours per week.
It will also be important to plan for how the FLSA change could result in wage-related litigation related to closer scrutiny from the DOL as well as heightened awareness through media coverage. Going forward, the salary threshold will adjust every three years to account for inflation on a regular basis. So, increasing the number of audits you conduct related to your employee classifications could go a long way to mitigating present and future compliance risks.
Vendor and IT Changes are Coming, Too
With all the administrative- and systems-related costs connected to reclassifying your employees — analyzing whether increasing some salaries above the salary threshold makes sense, and setting up enhanced, expanded timekeeping systems (with overtime alerts, of course) to support compliance — you may want to consider leaning on an compliance-focused HCM expert to seamlessly integrate compliance solutions. It is clear that, whatever compliance measures your organization adopts, CFOs will have to advocate for the systems and administrative support needed to truly and fully adapt to the new FLSA overtime rules.
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