Classifying Employees Under New FLSA Overtime Rule

In late September, the Department of Labor (DOL) announced a final rule that made changes to the Fair Labor Standards Act (FLSA). While the news wasn’t exactly welcomed by business owners, they likely breathed a collective sigh of relief in regard to the overtime provisions of the FLSA. 

The final rule updates the salary-level threshold required to exempt “white-collared” employees from overtime pay requirements of the FLSA. And while the increase is considerably less than what was proposed in 2016, employers are still faced with adapting to the changes that the rule presents. 

So let’s first take a look at what has changed, then consider what steps can be taken to ensure compliance and optimize operations by January 1, 2020–the rule’s effective date.

What Are the changes to FLSA?

According to the DOL, the changes to the FLSA are as follows:

  1. raising the “standard salary level” from the currently enforced level of $455 per week, to $684 per week (or for a full-year worker, from $23,660 per year to $35,568 per year);
  2. raising the total annual compensation level for “highly compensated employees (HCE)” from the currently-enforced level of $100,000 per year, to $107,432 per year;
  3. allowing employers to use non-discretionary bonuses and incentive payments that are paid at least annually to satisfy up to 10 percent of the standard salary level; and
  4. revising special salary levels for workers in U.S. territories and in the motion picture industry.

The first two points, addressing the standard and HCE salary levels, are the ones that will impact most employers as they decide whether to re-classify employees as exempt or non-exempt. The third point provides employers with more flexibility on how to reach a salary level for certain employees. And the fourth point refers to salary levels that differ from the first point based on region and industry.

So with that out of the way, what should you be considering as it relates to the FLSA classification of your employees? Here are four action steps that you can take to ensure that your organization is well positioned come January 1, 2020.

Step 1: Organize Management/Leadership Group

In order to make a classification decision, employers will have to pull together employee information relevant to salaries, hours, and job duties. This step will likely involve several people in larger organizations, and it is a vital one in order to avoid unexpected outcomes.

Step 2: Determine Which Employees will be Impacted

Once the necessary information is gathered from your leadership group, employers will want to focus on the following:

  • Identify “exempt” employees earning between $455 – $683 per week.
    • Calculate the average hours worked for these exempt employees.
    • Understand your options:
      • Reclassify “exempt” employees as “non-exempt” and pay overtime
      • Maintain “exempt” status and increase salary to $684 per week
  • Identify “exempt” HCE earning between $100,000 – $107,432 per year.
    • Calculate the average hours worked for these exempt employees.
    • Understand your options:
      • Reclassify “exempt” employees as “non-exempt” and pay overtime
      • Maintain “exempt” status and increase annual salary to $107,432, 
      • Maintain “exempt” status and salary, but adjust job duties to meet more stringent duties test

Step 3: Review Exempt Employees Impacted by Change

A common scenario that many employers will face is having an exempt employee who rarely works more than 40 hours per week, but whose salary falls well below the new “standard salary level.” In this case, strong consideration will be taken to re-classify the employee as non-exempt–leaving the employer to pay roughly the same.

On the other hand, some employers may have exempt employees who routinely work 60 hours per week with a salary below the new “standard salary level.” Here, the employer will have to calculate the cost of time and a half for those 20 hours of overtime each week. With that estimated overtime cost in mind, the employer will then need to determine whether increasing the employee’s salary to exceed the “standard salary level” represents a cost-savings.

A  couple, simple examples:

  1. Today, an exempt employee earns $35,000 annually and works 60 hours per week. That employee does not receive overtime pay.
    • In 2020, if that same employee is re-classified as non-exempt (since salary is under $35,568), they will save the employer a $568 salary increase, but will be entitled to 20 hours of overtime pay each week. Using the hourly rate of $16.80 and multiplying by 1.5 (time and a half), that employee will cost the employer around $26,000 in overtime pay annually, or $61,000 total. Decision: maintain “exempt” status and increase salary.
  2. Today, an exempt employee earns $27,000 annually and rarely works over 40 hours per week–let’s say 41 hours per week on average. That employee does not receive overtime pay.
    • In 2020, if that same employee is re-classified as non-exempt (since salary is under $35,568), they will save the employer a $8,568 salary increase, but will be entitled to overtime pay each week. Using the hourly rate of $12.98 and multiplying by 1.5 (time and a half), that employee will cost the employer around $1,000 in overtime pay annually, or $28,000 total. Decision: reclassify as “non-exempt” and pay overtime.

These two examples illustrate how employers can consider FLSA classification as it relates to the bottom line. The key questions to ask are:

  • What is the exempt employee’s adjusted hourly rate? (salary/52/40= hourly rate)
  • How many hours is the exempt employee working? (hours worked)
  • What is the estimated overtime pay for this employee? (1.5 x hourly rate x (hours worked – 40) = overtime pay)
  • Do they need to work that many hours? (can role be adjusted, hours shifted to others)
  • Should they be re-classified as non-exempt?

 

Step 4: Communicate Changes to Employees 

Of course, there are other considerations for employers other than the bottom line. Some employees will have no reaction to a re-classification, but others may have reason for concern. They may perceive that moving from exempt to non-exempt status is a demotion–even if it entitles them to overtime pay. So how you communicate any changes is important. Here are a few tips:

  • Explain that the re-classification is the result of a change in the law which takes effect 1/1/2020
  • Emphasize the benefits of the reclassification
  • Notify of time tracking responsibilities and expectations
  • Put everything in writing

Ideally, a conversation with an employee regarding an FLSA reclassification will take place in person. This provides the employees with the opportunity to ask questions and express concerns, which ensures that they have the right information at the outset. Perhaps more importantly. a face-to-face discussion in and of itself communicates that the employer values its employees. 

However, it’s also important to have the initial communication in writing. Documenting how and when FLSA re-classifications have taken place is important for compliance, but also for internal reference. Newly classified, non-exempt employees will need to understand time and attendance policies, expectations on tracking their time, and the consequences for failing to follow those policies and processes. Having this in writing helps to ensure that there are no gaps in communication and understanding.

Preparing for the New FLSA Overtime Rule

Making organizational changes in regard to new federal compliance requirements is never an easy task. As always, when making these changes and decisions, it’s always best to consult your organization’s legal counsel–but the clock is ticking. In order to optimize your organization’s operations and ensure FLSA compliance by January 1, you will need to take the first step of organizing your management leadership group very soon.

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