On Wednesday, May 18, 2016, the U.S. Department of Labor announced a major change to the overtime rules under the Fair Labor Standards Act (FLSA). The Obama administration estimates that the FLSA changes, which go into effect December 1, 2016, will make 4.2 million more U.S. workers eligible for overtime pay. The changes face strong opposition from the business community, which claims they go too far, too fast. But, President Obama points out that "it's one of the single most important steps we can take to help grow middle-class wages," according to a White House brief.

The Specific Changes in the FLSA Overtime Rules

The exempt salary threshold was increased from $23,660 per year, where it's been since 2004, to $47,476 ($913 per week). See the DOL fact sheet on the final rule. The original proposed rule, announced in June 2015, proposed an increase to the threshold to $50,440, which is about $3,000 more than the DOL's newly announced salary threshold. Under the new rules, the DOL will now update the salary threshold every three years to ensure that it "is maintained at the 40th percentile of full-time salaried workers in the lowest income region of the country."

In addition, the exempt threshold for highly compensated employees (HCEs) was increased from $100,000 annually to $134,004 annually, which is about $12,000 higher than the June 2015 proposal. Finally, and for the first time ever, employers will be able to count bonuses and commission payments toward as much as 10 percent of the standard salary threshold.

Some Important Rules Have NOT Changed
In determining whether an employee is non-exempt (eligible for overtime) or exempt (not overtime eligible), the "duties test" remains the same. Although the DOL's proposed rules sought comments on changing the duties test, which requires exempt employees to engage in certain job functions to be considered exempt, it will remain as is.

The Impact on Company Labor/Compensation Budgets
It depends on how many affected employees you have, but the new rules could cost a lot of companies money, according to the CFO Daily News. The White House estimates it will cost U.S. companies an additional $1.2 billion annually. The reclassification process will represent a large administrative expense, as will the system-related costs of expanding timekeeping for more employees. Finally, with many more non-exempt employees potentially qualifying for overtime, your overall compensation costs will likely rise.

In order to control overtime-related costs, you should reinforce and clearly communicate your overtime policies with your employees, emphasizing that unauthorized overtime will not be allowed and may represent a violation of the employee code of conduct.

What Companies Should Be Doing to Comply

Companies should determine the number of exempt employees who earn a salary under the new threshold of $47,476 and then either: (1) reclassify them as non-exempt, convert their salaries into hourly pay, and start tracking their time (the FLSA overtime rule changes reinforce the need for timekeeping capabilities) or (2) consider whether to bump employee salaries up above the threshold in order to keep said employees exempt. This will require a careful, deep-dive analysis of costs and benefits by your CFO and HR leadership team.

With the new rules, FLSA compliance just got more complex and more expensive. You will certainly need to enhance your timekeeping software capabilities as you track the hours of more non-exempt employees. You may also need expert compliance know-how. If you don't currently have in-house capability, a trusted, third-party advisor may help you navigate the new rules.

The Takeaway: Big changes are happening in the realm of overtime. This is an opportunity for you to focus on the situation holistically. Spend time evaluating role requirements and descriptions by looking at every job and determining if people are classified correctly. These evaluations and the decisions you make could affect your compensation costs and your employees' morale directly. The biggest takeaway? Act now and develop the best strategy for you and your employees before these rules take effect in December.

For more information on complying with the new FLSA overtime rules, see the Eye on Washington post.

Tags: FLSA change management