When the Fair Labor Standards Act (FLSA) was enacted in 1938, it signaled a new era for American workers. A piece of New Deal legislation, it introduced, among other things, practices like federal minimum wage, a 40-hour work week, and overtime provisions for many jobs. Since that time, the Act has seen numerous revisions. The federal minimum wage increased to $7.25 per hour in 2009.
Overtime: Exempt or Not?
Overtime exemptions have been a controversial aspect of the law. These exemptions apply to certain types of workers and make them exempt from overtime. Through the years, classifications have expanded and contracted. Most recently, in 2004, some working supervisors were added to possible exemptions, causing them to be ineligible for overtime. In July 2015, the Department of Labor (DOL) issued a Notice of Proposed Rulemaking that included changes to the FLSA exemptions.
There are a variety of exemptions currently in use. They include exemptions for executive, administrative, professional and computer employees, among others. Each has a different set of tests for the position to be classified as exempt. One common theme has been the salary test. A salaried employee currently has to be paid at least $455 per week to qualify as exempt.
The proposed rule change would increase that amount to $970 per week. The salary level would be updated annually and would be indexed to the 40th percentile of weekly earnings for full-time salaried workers based on Bureau of Labor Statistics (BLS) data.
It is important to point out that the duties tests were not changed. The DOL has signaled that it feels the salary test is important and perceived as the best way to distinguish between exempt and non-exempt employees. The change aims to help those working in lower-level supervisory and management positions. These people may work over 40 hours per week without overtime, yet make less than $24,000 per year.
Salary Test: Raising the Bar
The other salary change that has not received as much publicity is raising the salary test for highly compensated employees. Currently, a highly compensated employee can be exempt if she or he:
- Earns total annual compensation of $100,000 or more, including at least $455 per week on a salary basis
- Primary duty includes performing office or non-manual work
- Customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee
The proposed rule change would increase this annual compensation amount to $122,148. This level is the 90th percentile of weekly earnings of full-time salaried workers. The impact to workers on the lower end of the wage scale garners more attention than those earning $100,000+ per year. Nonetheless, this is a notable change for many.
Big Changes; Robust Response
For businesses of all sizes, the challenge becomes getting ready for these changes. Managers at all levels should be aware of these potential updates. While HR and financial professionals usually serve as subject matter experts, the effect of these regulations will be experienced throughout an enterprise. Expanding the dialogue throughout the organization will generate more ideas about how to address the issue. Senior management should recognize that these changes are coming and be able to communicate how it could impact the organization.
Companies will want to analyze their specific impact by asking some of the following questions:
- How many exempt employees have salaries that fall below the proposed $50,440 per year benchmark?
- Are certain affected positions better off being raised to the new level to keep them exempt? How much will those increases cost?
- Should some positions that are currently exempt be re-classified as non-exempt? How ill this impact potential overtime costs?
- Is there an impact from the increase in the highly compensated employee exemption?
Once any rule change is finalized, organizations will want to focus on updating their practices and policies. This may include updating human resources information systems (HRIS) and payroll. For those that outsource these functions, it will be important to have a collaborative working relationship with that vendor. This will ensure these changes are made in compliance with the law.
Some have argued that this change will increase many workers’ incomes. Others speculate that if businesses are forced to pay more in overtime or give raises to maintain exemptions, hiring could slow down or layoffs might occur. Each organization will have to address these issues with its own strategy. Part of that process will likely mean reviewing total rewards. An hourly rate or salary figure is only one part of an employee’s total compensation. Besides making changes to pay, many employers will want to consider a change to other benefits. These might include:
- Health insurance contributions
- HRA, HAS, and flexible spending options
- Leave and flexible workplace policies
- Contributions to retirement accounts
For those that may feel a major hit, all these options could be on the table for consideration. The other side of the coin is educating employees about the changes and strategy for adapting. An estimated 4.7 million workers could be affected by the proposal, and, of course, change is difficult for most people. In many workplaces people tend to fear and resist it, and when it comes to changes related to pay and benefits, anxiety only increases. This can be offset by taking a measured and transparent approach. Preparation will be key. Changes to the FLSA are slated to be finalized sometime in 2016. Affected employers will want to have done their homework to be ready for this update.
The FLSA isn’t the only thing companies should worry about. Check out our article on how to navigate the Affordable Care Act requirements for 2016.