Understanding the DOL’s New Overtime Rules July 2016 Presented by Sullivan Benefits

Introduction

Agenda • FLSA Overview • New Overtime Rule • Impact of New Overtime Rule • Compliance Examples • Developing an Implementation Plan

FLSA Overview

Does the FLSA apply? Step 1: Does an employment relationship exist? Step 2: Is the employer or employee covered by the FLSA? Step 3: Does a joint employment relationship exist?

FLSA Applicability FLSA coverage is very broad; many employers and most employees are subject to the FLSA. Enterprise

• Has at least two employees and is engaged in commerce with at least $500,000 in gross annual business • Hospitals, residential care facilities and schools • Public agencies

Employees

• Involved in interstate commerce (including the production of goods for commerce) • Some domestic service workers (housekeepers, fulltime babysitters, cooks) Covered even if employer is not a covered enterprise

Overtime Compensation One and a half times the regular wage rate for any hours worked over 40 during a workweek

Regular wage rate • Average hourly compensation during a workweek • Divide employee compensation by the numbers of hours worked during the workweek

Hours of work • “Suffers or permits” employee to work • Includes on-duty and “engaged to wait” time

Workweek • 7 consecutive 24-hour periods (168 hours)

White Collar Exemptions Executive, administrative and professional employees

Salary Basis Test

Outside sales employees

Employees in certain computerrelated occupations

Salary Level Test

Predetermined and fixed wages

Not subject to reduction due to quality or quantity of work

Minimum salary threshold to qualify for exemption

Highly compensated employees

Duties Test Based on the employee’s actual job duties

Must match the duties defined by law

Duties Test Executive

Administrative

Professional

• Manages the enterprise • Directs the work of two or more employees • Has authority to hire or fire

• Does office or non-manual work • Directly related to management or general business operations • Exercises discretion and independent judgment in matters of significance

• Learned professionaladvanced knowledge in field of science or learning • Creative professionalinvention, imagination, originality or talent in recognized field of artistic or creative endeavor

Computer

Outside Sales

Highly Compensated

• System analyst, programmer, computer engineer and similarly skilled employees • Does not apply to the manufacture or repair of computer hardware or heavy use of computers

• Salary requirements do not apply • Makes sales or obtains orders or contracts for services • Customarily and regularly engaged away from the employer’s premises or place of business

• Must perform office or nonmanual work • Must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee

New Final Rule on White Collar Exemptions

White Collar Exemption Final Rule – Effective Dec. 1, 2016 3 Major Changes

10 Percent Bonus/Commission Allowance

• Increase in the Standard Salary Salary Increase LevelLevel to $913 per week ($47,476 annually for a full-year worker)

• Increase in the HCE Compensation Level to $134,004 annually

• Allows nondiscretionary bonuses and incentive payments to be used to satisfy up to 10 percent of the new Standard Salary Level requirements

Automatic Future Salary Level Increases

• Provides for additional, automatic increases in the Salary Level requirements • Effective every three years

Final Rule – New Salary Levels

Standard Salary Level Current • $455 per week ($23,660 for a fullyear worker)

Effective Dec. 1, 2016 • $913 per week ($47,476 for a full-year worker)

Final Rule – Bonuses/Incentive Payments Up to 10 percent • Non-discretionary bonuses and incentive payments (including commissions) may satisfy up to 10 percent of the Standard Salary Level.

“Catch-up” payment • Employers may make one catch-up payment at the end of each quarter to satisfy the Standard Salary Level. • Payment must be made within one pay period after the end of the quarter.

Standard Salary Level Exemptions only • For HCE exemptions, the entire Standard Salary amount must be paid on a salary basis.

Final Rule – Bonuses/Incentive Payments

Exempt employee must receive at least $821.70 per week in salary (90 percent of the $913 Standard Salary Level)

10 percent

Remaining amount ($91.30 per week) may be paid in nondiscretionary bonuses and incentive payments (including commissions), as long as the payment is made: • At least quarterly; and • Within one pay period after the end of the quarter.

Final Rule – Bonuses/Incentive Payments

Quarterly Assessment Standard Salary Level: Quarterly Minimum 13 weeks

x

$913 weekly salary

=

$11,869.00

10 percent / “Catch-up” Payment Option 13 weeks

x

$821.70 weekly salary

=

$10,682.10

Difference (Must be paid within one pay period of the end of the quarter)

$1,186.90

Maximum Amount Allowable per Quarter in Bonuses/Incentive Payments to satisfy the Standard Salary Level in effect from Dec. 1, 2016 to Dec. 31, 2019

Final Rule – Bonuses/Incentive Payments Quarterly Assessment

• If paid salary plus nondiscretionary bonuses and incentive payments (including commissions) does not equal the Standard Salary Level for 13 weeks, employer has one pay period to make up for the shortfall (up to 10 percent of the Standard Salary Level). Catch-up Payment

• Amount only counts toward prior quarter’s salary amount, not toward the salary amount in the quarter in which it was paid. Effect of No Catch-up Payment

• Employee is entitled to overtime pay for any overtime hours worked during the quarter.

Example – “Catch-up” Payment Calculate Total Amount Paid During the Quarter Step 1: Quarterly Assessment

January

March

Total

$100 Bonus paid

$11,182.10

13 weeks x $821.70 salary $300 Bonus paid

Step 2: Determine Shortfall Amount

February

$100 Commission paid

Subtract Total Amount Paid During the Quarter from the Standard Salary Level Quarterly Minimum Standard Salary Level Quarterly Minimum

$11,869.00

Total Paid During Quarter

-$11,182.10

Difference

Step 3: Make Catchup Payment or Pay Overtime

$686.90

Option 1 Option 2 OR • Pay the employee the difference • Pay the employee overtime for ($686.90 in the example) within all hours he or she worked one pay period of the end of the above 40 in each of the 13 quarter workweeks

Final Rule – New HCE Compensation Level

Standard Salary $47,476

Entire amount must be paid on a salary basis • Bonuses/incentive payments do not count • No “catch-up” payment allowed

Additional compensation (at least $86,528)

May include bonuses and incentive payments (including commission)

HCE Compensation Level $134,004

Annual minimum employers must pay to an exempt white collar employee subject to Minimal Job Duties Test

Final Rule – New Salary Levels

HCE Compensation Level Current • $100,000 per year

Effective Dec. 1, 2016

• $134,004 per year

Final Rule – New Salary Levels New levels are set as fixed percentiles of the weekly earnings (as established by the Bureau of Labor Statistics) of full-time, salaried workers:

New HCE Level 90th percentile (annual equivalent) nationally

New Standard Level 40th percentile of lowestwage Census region (currently the South)

Final Rule – Automatic Salary Level Updates Every 3 years

• Automatic updates will occur every three years, effective on the first of the year.

Jan. 1, 2020

• The first automatic update will become effective on Jan. 1, 2020.

150 days before new effective dates

• DOL will publish updated levels at least 150 days before their effective dates. • Federal Register • Wage and Hour Division website

Final Rule – Automatic Salary Level Updates Salary levels will automatically update to the same fixed percentiles of the weekly earnings (as established by the Bureau of Labor Statistics) of fulltime, salaried workers:

HCE Level 90th percentile (annual equivalent) nationally

Standard Level 40th percentile of lowest-wage Census region

(PROJECTED ESTIMATE)

Impact on Employers

Compliance Options DEC. 1, 2016

Exempt employees earning less than $913 per week

Option 1

Option 2

Maintain exempt status

Reclassify as nonexempt

• Increase salary to at least $913 per week

• Keep salary and pay overtime at current salary rate • Reduce salary so that new wage and overtime hours equal current salary • Limit hours of work (no overtime allowed) • Redistribute hours of work to other employees • Hire additional employees

Employee Reclassification

Option 2 Reclassify as nonexempt

• Employee loses exempt status; and • Employee must receive overtime pay for any hours worked over 40 during a workweek No

• Limit hours of work • No pay change needed • No additional cost

Expected Overtime

Yes

• How often? • How many hours?

Expected Overtime Options

Option 2 Reclassify as nonexempt Expected Overtime

Manage Hours of Work • Limit authorized overtime • Redistribute hours of work (among existing employees or new hires)

Manage Wages/Salary • Fluctuating work arrangements • Reduce compensation so that regular wages and overtime equal current salary level

Additional Decision Considerations Consider ALL potential costs and issues, not just cost of salary changes

Employee Morale

Management Immediate salary costs

Timekeeping

Compliance Options: Examples

Examples: Regular Overtime Amy: Creative professional employee

$39,000 per year / $750 per week

Works an average of 46 hours per week (312 overtime hours per year)

Example: Regular Overtime Option 1

Option 2

Maintain exempt status

Reclassify as nonexempt

Increase salary to at least $47,476

Pay overtime

Reduce pay

(Keep current pay after Dec. 1, 2016)

$15.31 per hour ($612.40 per week)

Estimated cost: $8,476

Estimated cost: $8,776.56

Estimated cost: $9.88

Examples: Occasional Overtime Brad: Exempt administrator

$39,000 per year / $750 per week

Occasional overtime Expected 36 overtime hours per year

Example: Occasional Overtime Option 1

Option 2

Maintain exempt status

Reclassify as nonexempt

Pay overtime

Increase salary to at least $47,476

(Keep current pay level after Dec. 1, 2016)

$18.28 per hour ($731.20 per week)

Estimated cost: $8,476

Estimated cost: $1,012.68

Estimated cost: $9.52

Reduce pay

Examples: Cost Comparison

Amy REGULAR overtime

Brad OCCASSIONAL overtime

Maintain exempt status

Estimated cost: $8,476

Estimated cost: $8,476

Pay overtime

Estimated cost: $8,776.56

Estimated cost: $1,012.68

Reduce pay

Estimated cost: $9.88

Estimated cost: $9.52

Additional Considerations Maintaining exempt status

Paying overtime

Shifting hours Sharing the work

Budgeting for future salary level updates

Cost of additional, unexpected overtime hours

Reducing pay Employee morale

Employee skills Timekeeping and management costs

Timekeeping and management costs

Implementation Plan

Implementation Planning Involve Key Personnel

• Include C-suite, Legal, HR, IT, Payroll and Finance early on • Create collaborative teams Consider Costs and Issues

• Analyzing salaries and duties • Cost of increasing salary vs. reclassification (what to pay, how to pay it?) • Employee morale • Manager buy-in

Develop a Timeline for Compliance (Sample) July – Aug. 2016

Aug. – Sep. 2016

Oct. – Nov. 2016

Analyze data to identify affected employees.

Determine compliance strategy (pay adjustments, job reclassifications, etc.).

Communicate changes to affected employees.

Review job classifications and duties to ensure exempt employees meet duties tests.

Develop any new systems needed (timekeeping, management strategy, etc.).

Implement wage/salary adjustments.

Consult key personnel (HR, IT, Legal, etc.) to identify specific challenges and issues to consider.

Train managers and other key personnel on compliance strategy.

Implement job reclassifications.

Calculate and compare costs of compliance options.

Hire and train any additional employees needed for compliance.

Develop a Timeline for Compliance

Dec. 1, 2016 (Thursday)

Consider implementing full compliance as of the beginning of the pay period that includes Dec. 1, 2016.

Full Compliance

Employer Compliance - Automatic Updates Automatic Salary Level Updates • The final rule does not require automatic pay raises when the standard salary level increases. • However, employers should plan ahead to maintain any white collar exemptions

Mark Calendar for Aug. 5, 2019 (at least 150 days in advance)

• Check Federal Register and Wage and Hour Division website for updated salary levels • Plan ahead for salary changes, job reclassifications, etc.

FLSA Training Employees • Employment policies (overtime work, off-theclock work, meals, breaks, travel time, mobile devices, pre/post-shift activities, on-call work) • Timekeeping practices

Managers and Supervisors • • • •

Employee classification Timekeeping issues Enforcing overtime policies Handling FLSA risks

Effective Employee Communications Have a communication plan Present to managers and supervisors Designate spokesperson

Ripple Effects Potential Lawsuits

Compliance

Timekeeping

Employee morale

Unpaid overtime

NLRB—Protected concerted activity

Meal breaks and rest periods

Salary/work hour reductions

Improper classification

Cost of additional employee benefits

Working off the clock

Perceived demotion

Retaliation claims

Joint liability

Remote work (mobile devices)

Pay equity

Questions?

Thank you! This presentation is current as of the date presented and is for informational purposes only. It is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Please contact legal counsel for legal advice on specific situations. This presentation may not be duplicated or redistributed without permission. © 2016 Zywave, Inc. All rights reserved.