Prepare for New Overtime Rules Proposed by the Department of Labor

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Preparing for fluctuations in overtime to meet your peak season can be a challenge, and now you may have new rules to take into consideration. The U.S. Department of Labor (DOL) is proposing rule changes that could have a big impact on the way you do business when you're the busiest.[1]

Proposed changes to the Fair Labor Standards Act (FLSA) would increase the number of employees who are eligible for overtime by raising the threshold of overtime exemption from $23,660 to $50,440 per year. These proposed regulations were issued on July 6, 2015.

If the proposed regulations are finalized as currently written, it would mean that anyone paid below the $50,440 threshold would not be exempt from overtime on any work over 40 hours per week. You'll want to consider what these proposed rule changes mean when planning your labor costs and compliance efforts. Here are some initial considerations for mitigating the repercussions of these FLSA changes once enacted:

  • Start by classifying your employees by salary. Anyone making over the threshold amount ($50,440 or other amount if changed in final regulations) may be exempt from overtime if their job duties primarily involve executive, administrative or professional duties as defined under the regulations.
  • Make note of anyone whose salary does not exceed the threshold, as these employees may be entitled to receive overtime now. This could greatly change the landscape of your costs.

Keep in mind that each state may enact regulations that differ from federal regulations. You'll need to follow whichever set of directives is more generous to the employee.

Know Your Employees' Hours

It's crucial to identify exactly how many hours per week each of your employees works. If a previously exempt employee made $26,000 annually under the old rules, and actually worked 40 hours per week, then you can convert that salary into an hourly rate equal to their pay, or $12.50 per hour.

You would then need to monitor those employees' work hours proactively with threshold reports and/or scheduling tools to manage overtime costs and to ensure that any work exceeding 40 hours per week is paid at the appropriate overtime rate. This is a great first step, but not all situations will be this straightforward.

Consider Changes to Salaries

A different strategy may make sense for employees who make less than the proposed salary threshold, were previously exempt from overtime, and who typically work more than 40 hours per week. In this situation, you could consider raising employees' base salaries to at least the exemption threshold. To determine if this is a more cost-efficient approach, you will need to calculate the increased salary and compare it to the estimated overtime costs that would otherwise apply.

Examine these averages across your whole workforce. For example, if the average employee works eight hours of overtime per week at an hourly overtime rate of about $24 per hour, the average overtime paid would be around $10k per year. So you could consider whether any employees with a base salary of at least $40,000 per year who works the average or more should have their base salary increased. You should also extend this analysis to anyone with a lower base salary but higher than average historical overtime.

Monitoring Overtime

When preparing for seasonal overtime or your organization's busy season, you'll need to take a hard look at your budget. It might be prudent to consider whether hiring additional employees (full time, part time, or temporary) would be a more cost-effective strategy.

When making these decisions, it is important to keep in mind long-term goals and consider possible automation and technology possibilities as a way to control labor costs. For example, global organizations that automate leave and absence management had 33 percent less unplanned overtime, according to a report by the Aberdeen Group.[2] Automation related to scheduling can be an important tool in managing overtime. Think of having an automatic summary of hours so you can see who is approaching the maximum number of hours and select the best person for any open shift.

You may find that some overtime is unavoidable. Take a realistic look at your processes and workforce to determine whether you'll need to plan to permit overtime in your busy season. If you can identify it early, based on past years, you'll be able to set aside funds in your budget for overtime to occur as planned.

There obviously isn't a one-size-fits-all approach for your business to best respond to the proposed changes in FLSA overtime requirements. You may need to pick and choose from a variety of alternatives. With a peak season arriving soon for many industries, take steps now to make sure your organization is prepared to be profitable.

For additional information, view the webcast: Avoiding Common Wage and Hour Violations.

[1] ADP, LLC is not a law firm, and the information contained in this article is not legal advice. Any discussion of issues are factors you may or may not use in your decision making process. If legal advice is desired or required, the services of legal counsel are recommended.

[2] Aberdeen, Productivity: Managing and Measuring a Workforce, January 2015