The FLSA Overtime Rule Change: What It Means for HR

The Fair Labor Standards Act (FLSA) changes proposed by the U.S. Department of Labor (DOL) will affect a large swath of American businesses and their employees. The increase will reset the minimum salary an exempt employee can earn, which was last updated in 2004. Of course, with big changes to the FLSA — believed to be coming as soon as May — come big changes to HR. But how, exactly, will HR leaders be affected?

Increasing the Overtime Threshold

The biggest change coming from the proposed rule is the increase of the overtime exemption threshold. Currently, if employees earn more than $455 per week and satisfy certain other salary basis and duties tests to be considered exempt employees, then the employees are not entitled to overtime pay. The proposed change pushes the threshold to about $970 per week, according to the U.S. Department of Labor (DOL). This threshold, along with future thresholds, would be indexed to the 40th percentile of weekly earnings for full-time salaried workers. Highly compensated employees (HCEs) would be indexed to the 90th percentile of weekly earnings of full-time salaried workers.

It's been over a decade since the last change, so the increase is substantial, and the number of affected workers is very large. The DOL estimates that it could affect as many as 5 million white-collar workers in the first year alone. Some hail the proposed rule as a long time coming, while others point to the complexity of the new rules and the likeliness that they would lead to more litigation, not less.

The exemption from overtime pay is determined not only based upon the employee's salary level and salary basis, but also upon the employee's job duties. According to the National Law Review, employers will likely need to review whether exempt position job descriptions accurately reflect worker discretion and independent judgment and should take this opportunity to review each position and the employee's actual duties to ensure that the two align.

Other Implications – It's All About Change Management

The overtime change is the headline, but other affects are anticipated, as well. According to the Society for Human Resource Management (SHRM), along with the potentially costly need for an internal employer audit of FLSA exemptions, many employees who were once classified as exempt will be reclassified as non-exempt, meaning HR departments may have to reconsider workplace policies. Telecommuting policies may have to be revised to better manage the tracking of time and overtime rules should be revisited.

In addition, HR will have to communicate employees' reclassification and reasoning for it, counsel people who are concerned, get them onto a time tracking system, orient them to the hourly schedule, explain meal and other break policies, orient them to their new pay stub, explain how overtime is calculated, and any overtime policies the company has in place.

Does the FLSA Change Matter? Yes.

FLSA claims are the largest for litigation in the employment context already — 8,000 cases filed in the federal courts in both 2013 and 2014, according to the American Bar Association and over $400 million in settlements in both 2013 and 2014, according to NERA Economic Consulting. There are also more compliance audits and investigations. SHRM warns HR departments that there may be misclassification liability for employers that haven't performed recent classification audits.

Once employees are reclassified, time tracking will be a major consideration. Whether HR departments extend the use of their current system or buy into an entirely new one, tracking newly classified employees will be an important investment.

Taking Stock of Contractors

While not covered by the FLSA, this might be a good time to take stock of your freelance or contract employees, as well. In recent years, the DOL has taken a hard look at companies that have misclassified employees as contract workers, which bars them from benefits and minimum wage requirements. In fiscal year 2015 alone, the Wage and Hour Division of the DOL recovered more than $74 million in back wages for workers who should have been classified as employees.

The DOL defines an employee as a person who is "economically dependent" on the employer, rather than those who are in business for themselves. Determining whether contractors are properly classified will be the first step. You'll then want to go back and determine whether their salary and duties classify them as exempt or non-exempt under the new rules.

Positive Takeaways

HR departments will face new burdens, but there are several reasons for optimism:

  1. The proposed change to the highly compensated employee exemption could allow for nondiscretionary bonuses and incentive payments to be considered when working toward the HCE threshold. Currently, employers are not allowed to consider those types of compensation.
  2. While some professions see a shift in responsibility over time, certain positions still remain exempt from this rule, including outside salespersons, certain computer-related professionals, teachers and academic administrative personnel, doctors and lawyers, according to the DOL.
  3. The anticipated upheaval may make it possible to fund classification reviews. Although an overhead expense that will please no one, it could lead to improved alignment between real duties, pay and overtime policies that have drifted apart over time. It will also expose the actual number of hours worked, which can be the basis for rationalizing additional headcount that can be paid at a lower, regular rate.
  4. Performed in conjunction with effective software support, this realignment could result in workforce optimizations that lower costs and satisfy line-of-business managers.
  5. Workers who are currently working overtime and not getting compensated for it may display a higher level of engagement once they feel they are getting paid fairly for their time.
  6. HR can be a strategic partner by helping reform the workforce strategy and proposing alternatives to paying overtime by incorporating a mix of new hires, retraining, succession planning, and part-time and seasonal workers to fill spikes in demand.

What Can You Do Now?

The first thing organizations can do is to conduct a salary audit of their employees to determine who will potentially be reclassified as non-exempt under the new proposed rules. Remember, an employee's exemption status is based on salary level and basis, and duties tests. Once you have a solid understanding of how many people will need to be reshuffled, you can work with your CFO to determine costs to the organization.

Determining cost is not the only benefit of an audit. Getting a jump on reclassifying employees, as necessary, can help protect your organization from any possible litigation from misclassified employees.

Get familiar with the changes and take stock of your employees. Doing so will help your organization better plan for the future.

Tags: compensation planning personnel management Department of Labor FLSA overtime law Overtime Rules