HR PLAYBOOK A Human Resources Publication Exclusively for Merit Clients

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Overview of Regulatory Changes Applying Overtime Regulations to Your Organization Non-Profit Organizations and FLSA Coverage Crafting Your Compliance Strategy Critical Considerations for Implementation Communicating and Managing Morale Communication Tips

After a seemingly endless wait, the Department of Labor issued the final revised Fair Labor Standards Act (FLSA) regulations on May 18, 2016. At the direction of a memorandum from President Obama in 2014, the proposed regulations issued in July of 2015 were intended to update and modernize the white collar worker exemptions from overtime. After reviewing hundreds of thousands of comments, the Department of Labor has issued final regulations which will become effective on December 1, 2016. Arguably the most significant employment law change since the last FLSA update in 2004, an anticipated 4.2 million employees nationwide are expected to be newly eligible for overtime. Each year over the next ten years, the Department of Labor estimates that this change will cost U.S. businesses $1.2 billion dollars in additional overtime pay and $295 million in administrative and indirect managerial costs. Almost all businesses, large and small, for-profit and non-profit, will be affected, with the largest impact anticipated in the health services, wholesale, retail, hospitality, and professional services industries. Geographic regions with lower overall wages and standards of living will also be more heavily impacted.

Arguably the most significant employment law change since the last FLSA update in 2004, an anticipated 4.2 million employees nationwide are expected to be newly eligible for overtime. Almost all businesses, large and small, for-profit and non-profit, will be affected .

While we have provided an overview of the new regulations and applicability of the FLSA in this article, there are many nuances to complying based on your industry, location, and organizational status. Be sure to engage your HR Partner at Aureon HR as you explore the best options for implementing these changes in your organization.

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The minimum salary level for employees who can be considered exempt under the Executive, Administrative, and Professional exemptions will rise to $47,476 from $23,660 per year, or from $455 per week to $913 per week. While not as high as the initially proposed $50,440 minimum, the number has still doubled from the level set in 2004. The new minimum salary amount also applies to employees eligible for the Computer exemption (generally reserved for software developers and programmers), though still permits eligible employees to be paid by the hour and remain exempt, providing the hourly wage is at least $27.63. In response to many of the comments received regarding geographic differences in compensation and costs of living, the Department of Labor established the new minimum salary amount based on the 40 th percentile of earnings for full-time salaried workers in the lowest wage census region, which is currently the South. Moving forward, the regulation establishes a mechanism for automatically updating the minimum salary levels every three years, with the first update scheduled to go into effect on January 1, 2020.

The increase in the minimum salary does come with a bright spot for some employers. For the first time, employers are now permitted to credit non-discretionary incentives and commissions toward up to 10% the annual minimum salary amount. Such payments must be made on a quarterly or more frequent basis to count toward the minimum salary amount, and catch-up payments are allowed at the end of a quarter if the employee does not earn sufficient non-discretionary pay to meet the minimum salary amount. This provision brings some complexity to administering pay for certain employees, so be sure to work closely with your HR Partner at Aureon regarding how this may apply in your specific situation.

Highly compensated white-collar employees are eligible for exemption from overtime under a less rigorous duties test than other workers. The new regulation increases the minimum compensation requirement for highly compensated employees from $100,000 to $134,004, or at the 90 th percentile of salaried workers nationally. Employees must receive at least the minimum salary amount of $913 per week on a salary basis, and the remainder of compensation may be made up of non-discretionary incentives and commissions, with year-end catch-up payments permitted.

The increase in the minimum salary does come with a bright spot for some employers. For the first time, employers are now permitted to credit non-discretionary incentives and commissions toward up to 10% the annual minimum salary amount.

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The wild card for employers following the release of the proposed regulations in July 2015 was whether the duties tests for the standard exemptions will change. Proposed regulations invited commentary on whether the duties tests should be changed, but indicated no specific proposed changes. Though the current duties tests are far from perfect, employers are generally relieved that the final regulations did not change any of the current duties tests established in 2004.

The scope of the new FLSA regulations is limited to the white-collar exemptions from overtime pay, so other provisions relating items such as hours worked, overtime calculation, child labor, and worker classification remain unchanged. Specifically worth mentioning, the exemption for outside sales employees remained unchanged. The outside sales exemption has no minimum salary requirement, but does continue to require that qualifying employees customarily engage in making sales or obtaining orders on contracts away from the employer’s place of business. Inside sales employees have, at no time, been considered exempt unless they qualify for one of the other exemptions. Doctors, lawyers, and teachers at educational institutions also continue to be exempt from the minimum salary level test.

While the new regulations updated exemptions for white-collar workers, the applicability of the FLSA to organizations remains unchanged. However, in the wake of the significant revision, we have already received many questions regarding how and whether the Fair Labor Standards Act covers certain organizations and business.

The Fair Labor Standards Act includes two provisions for coverage: the enterprise coverage provision and the individual coverage provision. A covered enterprise, in which all employees working are covered by the FLSA, must have annual revenues of at least $500,000. Revenues include volume of business done or sales made. If your organization is not a covered enterprise, you’re not off the hook! Organizations not covered as an enterprise likely have many employees who are covered under the individual coverage provisions. Individual coverage is based on the work of each individual employee. Any employee who engages in interstate commerce, in the production of goods for interstate commerce, or moves persons or things across state lines is covered by the FLSA. Interstate commerce has a relatively broad definition and includes activities such as: Making out of state phone calls Sending or receiving mail or e-mail to or from another state Ordering or receiving goods for an out of state supplier Handling credit card transactions or performing the accounting and bookkeeping for such activities The individual coverage provision often ensures that most or all employees at an organization are considered covered under the FLSA, particularly those who use email or mail in the regular course of their job duties.

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One of the most prevalent myths we hear regarding the FLSA is that non-profit organizations are exempt from or not subject to some of its provisions. However, as discussed above, the individual coverage provisions still apply even when a non-profit may not be covered as an enterprise. To accompany the new regulations, the Department of Labor released guidance specific to non-profits which is useful in sorting out coverage and applicability: Guidance for Non-Profit Organizations on Paying Overtime under the Fair Labor Standards Act. Excerpts from this document explain how to apply FLSA coverage provisions to non-profits:

As a general matter, non-profit organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities that result in sales made or business done that meet the $500,000 threshold. Ordinary commercial activities are activities such as operating a business, like a gift shop. Activities that are charitable in nature, however, are not considered ordinary commercial activities, and do not establish enterprise coverage. Examples of activities that are charitable in nature and normally provided free of charge include the following: 

providing temporary shelter;

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providing clothing or food to homeless persons;

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providing domestic violence or other hotline counseling services; and

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providing disaster relief provisions.

In determining whether a non-profit organization is a covered enterprise, the Wage and Hour Division (WHD) considers only activities performed for a business purpose. Additionally, income that a nonprofit organization uses in furtherance of charitable activities is not factored into the $500,000 threshold. Such income might include contributions, membership fees, monetary and non-monetary donations, and dues (except for any portion for which the payer receives a benefit of more than token value in return).

Organizations that are not covered on an enterprise basis likely still have some employees who are covered individually and are therefore entitled to the FLSA’s protections.

Certain non-profit organizations are considered covered enterprises regardless of the dollar volume of business, including hospitals; institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher education. Aureon strongly advises all non-profits to thoroughly evaluate coverage under the FLSA in accordance with the enterprise and individual coverage provisions.

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In many cases, deciding how to change your employees’ compensation to comply with the new overtime regulations will be fairly straightforward. In some cases, particularly when a position requires the employee to work more than 40 hours per week, the decision is more complex. Here is an example which demonstrates the type of evaluation and decision-making employers must undertake when planning to comply with the new regulations: Maria, a front-line manager, currently makes $40,000 per year and is paid on a salary basis. She generally averages about 50 hours of work per week. $40,000 per year equates to $19.23 per hour based on a 40-hour work week. An employer has a few options to consider when determining how to modify Maria’s compensation to comply with the new regulations:

1. Pay Maria $19.23 per hour and allow her to continue working an average of 50 hours per week: Total annual wages would be $55,000 ($40,000 in hourly pay, $15,000 in overtime pay)

2. Continue to pay Maria a salary of $40,000 per year, but pay her overtime at 1.5 times $19.23 when she

works more than 40 hours: Total annual wages would be $55,000 (salary plus 10 hours of weekly overtime)

3. Pay Maria $19.23 per hour and restrict her to working no more than 40 hours per week: Total annual wages would be $40,000 with no overtime

4. Pay Maria $14.00 per hour and allow her to continue working an average of 50 hours per week: Total annual wages would remain at $40,000 ($29,120 in hourly pay, $10,920 in overtime pay) – however, Maria might quit because you’re now paying her $14.00 per hour!

5. Increase Maria’s salary to a minimum of $47,476, of course, providing her job duties continue to meet the duties tests for the applicable exemption from overtime pay. Remember that this minimum amount will increase effective January 1, 2020 and every three years thereafter. Any of these choices will have a significant impact on the organization as well as on Maria. Organizations must proactively manage the risks of compliance and non-compliance, however, no matter how disruptive the new regulations are to current operations and budgets. Liabilities for unpaid overtime are not a risk we would advise taking. As you see, in just Maria’s case, the potential unpaid overtime liability is $15,000 per year, which would mean a $30,000 price tag per year with liquidated damages, times two or three years.

The Aureon HR Playbook is created by our own Aureon HR Team just for you! We are listening to your questions and concerns, monitoring HR trends and regulatory activity, and taking note of employee relations and business issues which arise on a regular basis. We endeavor to address many of these in this quarterly publication, in addition to keeping you up to date on regulatory changes and requirements which may affect your organization. Your feedback and suggestions are welcome! HR Playbook is a publication of Aureon, 7760 Office Plaza Drive South, West Des Moines, IA 50266. Questions? Contact Sarah Charlier, SPHR, SHRM-SCP at [email protected]. Aureon HR Playbook Spring 2016

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In the wake of making changes to employee compensation, additional factors, regulations, and best practices may influence the decisions you make regarding implementation: Employees in the same position should be classified in the same manner. When evaluating compensation for individual employees, organizations must also consider exempt classifications by position and not just by individual. To most effectively mitigate risk and provide consistent treatment of similarly situated employees, exempt and non-exempt classifications should be applied to a position and not a person. For example, should your pay rage for a supervisor role be $40,000 to $60,000, all employees within that role should be classified as non-exempt, even if their salary is above the minimum of $47,476 per year. In some cases, employers may be able to differentiate more highly compensated employees by creating different job titles for groups of employees, as often when there is a large difference in compensation, there is also a difference in job duties, years of experience, and other compensable factors. There is no requirement to make an employee exempt from overtime if they qualify. Remember that exemptions from overtime are the exception – employees can always be paid on an hourly basis with overtime regardless of the amount of money they make. So while an employee may make more than the minimum salary, there is no obligation or requirement on the employer’s part to classify the position as exempt.

To most effectively mitigate risk and provide consistent treatment of similarly situated employees, exempt and nonexempt classifications should be applied to a position and not a person.

Overtime is calculated based on a 7-day workweek. Though this is a very basic requirement of the FLSA, calculating overtime can get confusing when factoring in an employer’s pay period schedule. An employer can designate the 7-day period they wish to use for purposes of calculating overtime, for example, 12:00 am on Monday thorough 11:59 pm on Sunday. While there are a few very limited exceptions to this rule, employers must almost always use their 7-day work week to determine how much overtime pay an employee is owed. Paying overtime on more than 80 hours in a two-week pay period, for example, rather than two 40-hour weeks, would be considered a violation and could expose the organization to significant liability for unpaid overtime. If an employee works 30 hours in one week and 50 hours in the next, the employer is still required to pay the employee for 10 hours of overtime in the pay period even though the employee only worked 80 hours.

While an employee may make more than the minimum salary, there is no obligation or requirement on the employer’s part to classify the position as exempt.

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Commissions and incentives must be included in the overtime pay rate for non -exempt employees. According to the provisions of the FLSA, overtime must be paid to non-exempt employees at one and one half times the employee’s regular rate of pay. The employee’s regular rate of pay includes all remuneration excepting expenses incurred on the employer's behalf, premium payments for overtime work or the true premiums paid for work on Saturdays, Sundays, and holidays, discretionary bonuses, gifts and payments in the nature of gifts on special occasions, and payments for occasional periods when no work is performed due to vacation, holidays, or illness. Earnings may be determined on a piece-rate, salary, commission, or some other basis, but in all such cases the overtime pay due must be computed on the basis of the average hourly rate derived from such earnings. This is calculated by dividing the total pay for employment (except for the statutory exclusions noted above) in any workweek by the total number of hours actually worked.

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Be aware of recordkeeping requirements. The Fair Labor Standards Act requires that employers keep certain records for non-exempt employees, including total hours worked each workweek, hours worked each day, total daily or weekly straight-time earnings, total weekly overtime earnings, and the basis on which each employee’s wages are paid. Should you re-classify some of your employees from exempt to non-exempt, be certain that you are maintaining time records in accordance with the regulatory requirements. Re-classifying employees as independent contractors is rarely a good idea. We mention this because a few weeks before announcing the proposed revisions to the overtime rule, the Department of Labor released their first Administrator’s Interpretation of 2015, titled: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors. If you are looking at this option, read this closely and be aware that the Department of Labor essentially pre-emptively raised the bar for independent contractor classification in this publication. Re-visit your remote work and system access policies. Answering email, work ing remotely, and making calls all add up to more hours worked, and these hours must be recorded and considered when non-exempt employees are reporting hours worked each day and each week. Many employers are completely turning off access for non-exempt employees to ensure they don’t have exposure for unpaid and unreported overtime, and some are tightening up reporting rules and requirements. Be sure not to lose sight of how you will restrict or track remote work as you evaluate your strategies for compliance. Measure your potential overtime liability in advance. The new regulations aren’t effective until December 1, 2016, which provides employers some time to gather information in advance of making compensation changes. Consider having potentially affected employees track ALL of their hours worked for a few weeks or months. Armed with the actual amount of hours employees are working, you will be able to make well-informed decisions regarding changes to employee compensation, budgeting, scheduling, and hiring. Double-check state regulations before making any changes. A few states have regulations regarding overtime or exempt employee classification which are more stringent than federal requirements. Your Aureon HR Partner can assist you in researching requirements in the states in which you do business.

One of the advantages of having six months to implement changes in light of the new overtime regulations is that employers have time to consider and create employee communication strategies. Some employees wear their exempt status like a badge of honor and changing to non-exempt may feel like a demotion. Other employees enjoy working at a more leisurely pace knowing they can stay late or arrive early to complete their work. And a few feel that they get their best work done at midnight and like the flexibility of working when they feel most creative. You know your employees and can likely anticipate some of the reactions you will experience when you announce the changes. The good news: you can blame the federal government. As a business owner or leader, one of your responsibilities and risk mitigation strategies is to comply with employment laws. In many cases, simply increasing an employee’s salary to $47,476 isn’t feasible and you really will have no choice other than to change employees to non-exempt status, ask them to track their daily and weekly hours worked, and pay them for all overtime worked. The other good news (for your employees): work -life balance is about to improve. While employers are having to come to terms with paying more overtime, many employees will be spending more time with their families while still receiving the same amount of pay. Aureon HR Playbook Spring 2016

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Caution points: Employees accustomed to working when they aren’t in the offi ce may find the loss of the ability to check email or return calls after hours difficult to adapt to. The workaholics on your team may try to put in extra hours without reporting them, so be sure to make your policy on reporting time very clear. We advise that you are VERY clear that ALL time worked be reported, and that un-reported work (i.e. working off the clock) will result in disciplinary action. Your managers and employees should fully understand that there is no unofficial approval of off-the-clock work and that you don’t just expect employees to always report working 8 hours per day, as this message often results in employees documenting and reporting 8 hours regardless of how much time they actually work.

A certain amount of risk in usually involved in making significant changes to employee pay and schedules. To help mitigate the risks of lost productivity, unreported overtime, employment claims, and hurt feelings, put some thought and advance planning into communicating changes to your employees. Communicate early, communicate often, manage expectations, consider feelings, and anticipate reactions of those employees you think may have trouble adjusting. Communicate early to potentially affected employees. Overtime regulation changes have received a substantial amount of publicity so it’s likely that many employees are already aware they may be affected by the regulations. Consider sending a communication to all or just potentially affected employees stating that you are working on evaluating the impact of the regulations, some changes should be expected to ensure compliance, you will be speaking with affected employees individually, and to contact a designated person with questions. Communicate your decision regarding re-classification to non-exempt or wage changes to affected employees as early as you can. We recognize that a lot can happen in six months, so for some organizations now may be too early. However, providing advance notice will help employees adjust to their new reality well ahead of the actual implementation date. In some cases, employees who make more than the minimum salary will be re-classified when the status of their position is changed, so knowing early will help them more effectively adjust to the change. Policy changes should be communicated early and often. While you may not implement any new policies, some employees will find that policies apply differently when they change to non-exempt status. For example, your timekeeping and reporting policy, overtime policy, paid time off policy, remote work policy, inclement weather policy, and after-hours email policy will likely apply differently to hourly employees. Identify the differences in applicability and administration now to ensure changes occur as smoothly as possible in December.

Virtually all U.S. employers will be affected in some manner by the revisions to overtime exemptions. Conducting a review of current employee wages and exempt status is the first step in evaluating how your organization will be affected. Your Aureon HR Partner is well versed and ready to assist you in working through the nuances of FLSA compliance. We have already worked through compliance strategies with many of our clients and look forward to providing our expertise and resources as you develop your compliance strategy.

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