The FLSA Changes Are Coming: Business Considerations and Implementation Strategies
By: Deborah Brouwer and Kellen Myers, Nemeth Law, P.C.
Attorneys and their business clients are likely well aware of the revisions to the Department of Labor's overtime regulations, effective December 1 of this year, given the level of publicity the changes have received. With implementation looming, it is becoming evident that the new overtime regulations will pose difficult decisions for companies and their legal counsel. In some cases, a company's entire business model may be impacted. Legal counsel for these companies will need to have answers not only for complex legal issues regarding exempt/non-exempt employee status, but also may need to play a larger role in counseling their clients on how to adapt to these regulations and implement them effectively.
Since the new regulation was announced in May, prudent companies have undergone strategic business planning and financial review to prepare for these changes and the impact they may have on the bottom line. That said, what may have been overlooked is how exactly an employer should implement any changes and how best to communicate these changes to employees. This article briefly reviews the changes to the overtime regulations, discusses what implementation plans most employers will have to consider, and suggests strategies for communicating changes to employees to minimize litigation and morale concerns.
The Overtime Changes – a Brief Review
The new overtime regulations adjust the salary level set by the Department of Labor for the "white collar" exemptions to apply to a worker. These exemptions (executive, administrative, highly compensated employee, and professional) are only available if an employee meets three requirements – the salary basis test, the salary level test, and the job duties test. The new regulations change only the salary level test, by increasing the minimum salary level from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The Department of Labor estimates that this change will impact around 4.2 million workers across the nation. The other two tests remain unchanged.
The white-collar exemptions are generally meant for employees whose primary duties are the performance of non-manual work in an office or professional environment. Each exemption's name is generally reflective of the job duties required and the type of employee it is meant to cover. Thus, executive employees are those who manage the business or enterprise, who customarily and regularly direct the work of at least two or more full-time employees (or their equivalents), and who have the authority to hire and fire employees or whose recommendations are given particular weight as to hiring or firing decisions. An administrative employee is one whose primary duties are the performance of non-manual work directly related to the management of the general business operations of the company (or its customers) in the areas of finance, accounting, human resources, advertising, purchasing, among others, and who exercises independent discretion with respect to matters of significance in those areas.
Lastly, the professional exemption is broken down to two categories: learned professional and creative professional. Learned professionals are those whose primary duties require advanced knowledge in a field of science or learning that is predominantly intellectual in character, and generally requires a prolonged course of specialized intellectual instruction. Some examples of professionals likely to qualify under this exemption are engineers, registered nurses, social workers, architects, etc. The creative-professional exemption covers employees whose primary duty requires invention, imagination, originality or talent in recognized artistic fields. Composers, writers, novelists and the like generally meet these requirements.
The new overtime regulations also raised the salary level required for an employee to be exempt under the highly compensated employee exemption from $100,000 per year to $134,000. These employees are a hybrid exemption of sorts. Thus, if an employee makes $134,000 a year or more in salary and regularly performs at least one of the duties of an exempt executive, administrative or professional employee, they are considered exempt.
What Options Does a Company Have?
Again, all three tests must be met for an employee to be exempt from overtime requirements. With the increase in the salary level test to $955/week, many employees previously exempt will become non-exempt. The issue then becomes how to respond.
The most straightforward option is to increase the salary of those currently exempt (but soon to become non-exempt) employees. Although simplest in execution, this option may be cost prohibitive for some companies. Alternatively, an employer could continue to pay these employees at their current salary level but implement and strictly enforce an overtime approval process (and associated payroll policies). Employees also would be required to record hours worked. If such an employee works over 40 hours, the employer would pay overtime for those hours, based on a calculation of their salary rate into an hourly rate (the Department of Labor regulations provide various examples of ways an employer can do this). Employees also should be advised that working non-approved overtime hours (which have to be paid if the employee did the work) will subject the employee to potential discipline. Lastly, an employer could reclassify these employees as non-exempt hourly employees. In other words, the employees would be turned into traditional hourly employees with a set hourly rate of pay. Again, the employer would have to track hours worked and pay the employees accordingly.
Each of these options has its advantages and disadvantages. What will work best for a company depends on factors such as budgeted payroll costs, the number of employees impacted, the roles or positions these employees play in the organization, whether the expected workload for these employees will change, and cost considerations.
Best Practices for Implementing/Communicating these Changes
It is important to be mindful that salaried status may be of high social value to an employee. Employees may see it as a sign of their importance to the organization, in comparison to hourly employees who clock in/out and have their hours tracked closely. Thus, prior to implementing any changes, an employer should consider the impact these changes will have on employee morale and retention.
Develop the message that will be delivered to the affected employees. Consider how the chosen plan will affect these employees and their day-to-day activities. Make sure to explain what the changes are and why they are being made. Every employee who will be affected
must be informed of the changes and what new policies or procedures he or she needs to follow (including whether any disciplinary steps will be taken for non-compliance). These communications should be structured with the help of counsel as much as possible. Name a primary resource to whom employees can go with questions – whether individual supervisors or the HR Department. Consider whether this contact will need direct communication with the company's legal counsel to address any issues needing immediate attention.
Train supervisors and employees. This is an essential and often overlooked issue. Many supervisors may not be aware of the importance of tracking employee work time, if they previously supervised only exempt workers. They may not even know what activities are considered work time by the Department of Labor – such as travel time, time spent putting uniforms on, on-call time, lunchtime, or time spent answering work emails after hours. Supervisors who fail to abide by new policy changes or requirements could place the company in jeopardy of litigation if employees are not paid properly. In addition, supervisors need to know what information they are allowed to communicate to employees. It is worthwhile to have legal counsel prepare a presentation and training session for key supervisors and personnel.
Be prepared for one-on-one conversations with employees who are disappointed by these changes. Those employees who were previously salaried (or those who now have to closely report their hours) will have many questions. For example, he may ask why he was moved to hourly status but one of his co-workers (in a different classification) was not. He may ask if he still has flexibility in his schedule to take his children to daycare or to work from home if a child is sick. He also may ask whether this will affect vacation time or PTO policies. He could even inquire whether his workload will be reduced because it may be difficult for him to finish the assigned work in 40 hours. Employers will need to have answers for each of these questions, which will depend not only on the company's business structure and productivity considerations, but the type of work environment it wishes to provide for its employees.
Throughout this process, legal counsel should remind these organizations that this is not a one-time process. Under the new regulations, the salary level test will be adjusted every three years beginning January 1, 2020. The Department of Labor will give approximately 150-days' notice prior to the new salary levels taking effect – which is not a significant amount of time. Thus, following these upcoming changes, legal counsel should discuss a continuous review strategy with their clients to prepare for these future adjustments.