In part one of this two-part FLSA Overtime Rule series, we’ll take a look at the new requirements and how they may affect your business.
The Department of Labor (DOL) recently issued a new overtime rule that will have a big impact on most U.S. employers.
The highly anticipated FLSA change increased the salary level for employees who can be classified as exempt or “salaried.” Specifically, the minimum salary more than doubled from $455/week ($23,660 annually) to $913/week ($47,476 annually).
So what does that mean to you? Well, with very limited exceptions, your employees making less than $47,476 a year can’t be “salaried” and will be eligible for overtime pay.
The DOL estimates more than 4 million workers who are currently exempt will be eligible for overtime under these latest regulations. The rule will become effective December 1, 2016, so it’s important to begin taking the necessary steps to comply.
Check out our recent article on determining exempt or non-exempt status.
Next steps with the overtime changes
Due to these FLSA changes, you’ll need to carefully review your salaried employees’ hours and payroll budget. In some cases, it may be best to just boost salaries that are close to the threshold so you can avoid overtime issues altogether. In other cases, you may want to reclassify employees as hourly and closely track their hours to control overtime costs.
Let’s take a closer look at your two primary options with affected employees:
- Increase employee salaries to avoid having to calculate and pay overtime: If you want to keep the employee as salaried/exempt, consider changing the employee’s pay and job duties to meet exemption criteria. Remember, salary is just one factor in classifying an employee as salaried and exempt from overtime. It’s the employee’s pay, plus actual job duties, that determines exempt/non-exempt status.
- Reclassify employees as nonexempt or “hourly” and pay them for any overtime they earn: If you don’t want to change the employee’s pay, you should change the employee’s classification to non-exempt. Keep in mind that, as long as you don’t go below the legal minimum wage, you can pay an hourly rate that takes an employee’s usual overtime into account. Once an employee is reclassified as non-exempt, overtime will typically have to be paid at one and one-half times the employee’s hourly rate.
Documentation and communication are critical
Once you’ve made these employee classification decisions, you’ll need to document all payroll status changes. Include any changes in the employee’s compensation, basis of pay (hourly, salary, fee basis, or other), job title, duties and responsibilities, and related information. You should review the change with the affected employee, and have the employee sign the form.
Keep in mind that employees will have very different reactions to going from salary to hourly. It will range from, “Hooray, now I get overtime!” to “This feels like a demotion.” The best way to keep morale up is through clear communication.
Remind employees that this change is required by federal law, and it’s not a company initiative. Explain that the purpose of the law is to fairly pay employees for all hours of work. And reassure affected staff that the change is not a reflection of performance, rank or value to the company. (We’ll have additional transition tips for you in our next FLSA post. Keep an eye out for it!)
Finally, think about doing timekeeping training for employees going from salary to hourly — and for supervisors who now will need to approve overtime and time sheets. Areas to cover include overtime approvals, off-the-clock work, comp time, mandatory meal/rest breaks (if applicable), timekeeping methods and how to report corrections to hours worked. Again, it’s best to have a written policy and require employee signatures.