Matters Column

Coping with new Fair Labor Standards Act regulations

November 11, 2016
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Anyone involved with trying to operate a successful business or nonprofit organization knows it isn’t easy to juggle all of the responsibilities. Sometimes, if feels like you can’t get ahead in the game, because every time you turn around, there is a new crisis to resolve. And for the most part, you feel like you are on your own and no one is helping you. The momentum also seems to be picking up, so you must move even faster to stay on top of things. In fact, this feeling is one of those factors that make many people feel we, as a country, have been going in the wrong direction.

While we don’t know what will happen specifically with the minimum wage and equal pay under a new presidential administration, we do have a pretty good understanding of the requirements for the most recent changes in the Fair Labor Standards Act that becomes effective Dec. 1. The rules have been laid out in various bulletins, but there is a question of how well everyone understands them.

What are the rules?

The specific changes I’m referring to are the new rules on exemption from paying overtime to certain employees. Without going into a lot of detail, let me just say, in most instances, employers are required to pay employees 1.5 times their regular hourly rate for each hour they work, with management approval, over 40 hours in a week. There are two principle considerations: What is the nature of their work and how much are they expected to be paid for that work? The new regulations of the FLSA do not change the rules related to the type of work performed. These rules say if the work falls into one of four categories, the employer may be exempt from the requirement of paying overtime for work over 40 hours in a week. The four categories are: a manager; a recognized professional; an “outside” sales person; and an executive administrator. Most of these positions are clear, apart from the last one, which gets a little sticky from time to time. All other employees are considered as hourly and eligible for overtime pay. For the moment, we will assume you have all the employees in the right categories.

The current crux is the second aspect of the regulations. How much do the people in these categories get paid? The old rules said they had to be paid more than $455 per week or $23,660 per year. These rates were rather meaningless with current pay practices, since the rules had not been updated since 2004. The new rules say exempt employees must be paid a regular rate that is at least $901 per week and $47,476 per year. If you don’t do that, you must pay the employee overtime on a weekly basis, starting Dec. 1.

Dealing with the rules

Now that you know the rules, the next step is to determine who falls below the requirements. If employees in one of the four exempt categories noted above are paid less than the requirements, what do you do?  Many employers assume you must change their pay to the higher rate — this is not the case.  You can simply tell employees they now are eligible for overtime pay when they work over 40 hours in a week.

There are a few other things you might consider to minimize the impact of this rule change. First, you can tell employees to not work overtime — be more efficient, get the job done in 40 hours, delegate parts of their job to lower-paid employees. However, you might also want to do a couple of calculations to see if maybe paying overtime is reasonable alternative. 

Start by calculating the actual hourly rate. Once you have that clarified, add 50 percent to that rate. This is what you will pay these formally exempt employees for each hour they work overtime. The next calculation you should make is to determine the difference between their former salary and the new threshold. To illustrate the process let’s assume the old salary was $750 per week or $39,000 per year or $18.75 per hour.  The difference to the new threshold is $8,476. The overtime rate would be $28.13. In our example, this person could be paid 301 hours of overtime during the year, and it would not cost you any more than moving them to the higher salary. They could work almost six hours of overtime each week, and it would not cost any more.

In addition, keep in mind that any week they are off for a holiday, vacation or a sick or personal day, that is a week they will not likely meet the 40 requirement. You can also make the change to the new salary base at any time.

There is one more provision the organization may use to meet the new higher level salary requirement. Nondiscretionary incentive payments or bonuses can be added to any existing salary base to meet the salary test. That is, up to 10 percent of the $47,476 annual threshold, or $4,747, can come from nondiscretionary pay plan provisions. (These payments of $1,186.90 must be calculated and paid on a quarterly basis.) If the combination of old salary and nondiscretionary payments exceed the threshold, you don’t have to do anything.

Other considerations

If you decide to go the nonexempt pay route, don’t forget to look at your policies that describe benefits, such as vacation and sick time. You may need to consider how these will apply to the employees with the new status. You may want to consider a select guarantee for existing employees, so they don’t lose these benefits and you have a morale impact.

Don’t forget there are other ways to adjust to the new requirements that could drive you to be a more effectively managed organization through strategic planning, retraining, restructuring various jobs or paying employees more to retain staff; that can actually be a good thing.

Ardon Schambers is principal at P3HR Consulting & Services.

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