Jeff Rummel, CPA, is the controller and vice president of accounting at VGM Group, Inc., a national leader in providing business solutions to diverse industries, including health care, restaurant and golf, insurance and other businesses across North America. He is the lead accounting officer with ultimate responsibility for all financial reporting, financial measurement, payroll, treasury, tax and compliance as well as a majority of VGM’s billing, collections, accounts payable, disbursements and financial analysis. He can be reached at email@example.com.
At the time of publication, the Fair Labor Standards Act was set to take effect on December 1. On Wednesday, November 23, a federal judge issued an injunction against the new law. For more information about the case, check out the following stories from some of the major news outlets.
Texas Judge Issues Nationwide Injunction Against Obama's Overtime Rule
Read more at forbes.com.
A Federal Judge Just Blocked the Obama Administration's Signature Overtime Rule
Read more at fortune.com.
Judge halts federal rule that would have expanded overtime pay to millions of workers
Read more at washingtonpost.com.
Federal Judge Blocks Obama Administration's Overtime Pay Rule
Read more at npr.org.
With only three months remaining before the U.S. Department of Labor’s (DOL) final rule revising the “white collar” overtime exemption takes effect, businesses throughout the country should be preparing for the significant changes coming their way.
On May 18, the DOL issued updates to the Fair Labor Standards Act (FLSA) overtime provisions. The final regulations focused primarily on updating the salary and compensation levels for executive, administrative and professional workers by increasing the standard salary level of full-time employees.
Companies with gross volume sales greater than $500,000 will have until December 1 to assess the impact the new rules will have on business and implement a strategy to comply with them. The rules will certainly impose new costs on businesses and require decision makers and those overseeing human resources and financials to incorporate even more analytics into their business planning.
Key Provisions to the Final Rules
$500,000 Sales Threshold
The FLSA final rule applies only to employers with gross volume sales of $500,000 or more, hence, some smaller HME companies may not be affected.
$47,476 Wage Threshold
To determine those employees who should be included in overtime pay requirements—in other words, nonexempt employees—the DOL set the new threshold at the 40th percentile of earnings of full-time salaried workers in the lowest wage Census Region, the South. This results in a new wage exemption of $913/week ($47,476/year), a significant increase from the current rate of $455/week ($23,660/year), set in 2004.
Salaried and hourly workers paid below the threshold amount are generally eligible for overtime when they work more than 40 hours per week. However, a new provision in the FLSA allows employers to count a portion of nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent ($4,747/year) of the new standard salary level. For example, an employee with an annual salary of $42,728.40 with at least $4,747.60 in bonuses and commissions would meet the wage threshold. Be aware, however, that these bonuses and incentives must be paid on a quarterly or shorter basis to comply with the FLSA.
Employees paid above the threshold amount may be exempt from overtime pay provided their job descriptions pass “exemption tests.” To exempt an employee from overtime, FLSA regulations require employers to apply three tests in order to confirm they can be excluded:
- Salary Basis Test: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
- Salary Level Test: The amount of salary paid must meet a minimum, specified amount (under the Final Rule: $913/week, or $47,476/year).
- Duties Test: Employees must pass each prong of the test in order to satisfy the duties test. The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations. The test involves assessing the level of independent decision-making, management of business activities, direction of others’ work, specialized training and/or scope of authority involved in the day-to-day performance of work.
The FLSA will not be making changes to the Duties Test under the Final Rule; however, employers should document the basis for job classifications and plan to review all exempt employees annually.
Tracking Hours Worked
Businesses with salaried employees who fall below the new exempt salary threshold will now be required to have a time-tracking system in place that accurately records work hours. This helps to document and protect against FLSA violations. No specific method for time tracking is mandated; however, the system used “must be accurate and correctly account hours for regular and overtime pay.”
To begin, you will need to examine employee compensation and determine who is affected. The impact of the strategies for managing the changes to the FLSA needs to be mapped out now so that your business is prepared to navigate the changes on all of these fronts by December 1.
The types of HME workers affected by these regulations will vary among companies, but many will fall under a general descriptor of “lead,” “manager” or “supervisor” with common title examples such as:
- Warehouse/distribution manager
- Billing/reimbursement manager
- Lead customer service representative
- Lead therapist
- Clinical rehabilitation specialist
- Retail manager
- Purchasing manager
- Operations manager
Businesses have some flexibility in how to address the impact the Final Rule has on operations. Upon completion of your payroll audit and exemption tests, employers have several options for reclassifying employees:
- Employees who fall below the threshold can continue to work more than 40 hours per week and be paid at the overtime rate.
- Employers can limit nonexempt employees to 40 hours of work per week in order to limit the amount of overtime that will be paid. Employees who remain exempt from overtime may need to pick up the remaining work in order to meet your business needs.
- Job descriptions can be redesigned to take into account the new FLSA regulations; workloads, schedules and duties can be adjusted accordingly to take into account the expected activities of exempt and nonexempt employees.
- Employees close to the $47,476 threshold may receive a compensation increase in order to continue to work overtime without the need to be paid for it. (Must administer exemption tests to justify OT exemption.)
- Employers should note that most state laws require a notice of pay change 7 to 14 days in advance (30 days in Missouri) for compensation reductions.
It is unlikely many nonexempt workers will see their take-home pay increase simply because they gained the potential to earn overtime pay. More so, in the wake of changing regulations, many employers will consider a variety of strategies to reduce the additional labor costs in order to remain competitive.
As my colleague Mark Higley, vice president of regulatory affairs, VGM Group Inc., stated, “In my analysis of relevant academic research and interviews with industry experts, indications are that many employers will be adjusting compensation schemes to ensure they do not absorb additional labor costs. To do this they might lower hourly rates of pay to leave total pay largely unchanged; cut bonuses, commissions and benefits in order to increase base salaries above the new threshold; and reduce some workers’ hours to fewer than 40 per week in order to avoid paying overtime, cutting compensation proportionally.”
You may also need to assess the need to end incentive payments or bonus pools for many employees currently eligible for such payments.
On the positive side, the new regulations have presented employers with an opportunity to correct classification issues with reduced risk of potential legal liability. According to employment law attorney Leonard V. Feigel, as reported in cfonewsdaily.com, “The publication of the final rules may provide a hidden opportunity for employers to reclassify some positions that may have changed during the years and may no longer qualify for an exemption.”
Communicate the Changes
The new regulations will result in many salaried workers being converted to hourly—losing certain benefits and prestige—and most likely these employees will view the change as a demotion.
Employers should educate managers and employees alike to prepare them for December 1. Create talking points and FAQs to help mitigate potential employee relations issues. Reassure employees that a reclassification is the result of federal regulations and not a lack of confidence in the employees or their abilities.
Keep an open line of communication between managers and their reclassified employees to help aid in a successful transition to the new payroll changes.
Establish Best Practices
The FLSA overtime rules are inevitable. However, by establishing best practices, you will position your business to remain compliant, protect your bottom line and be prepared for future adjustments.
Establish a mechanism for automatically updating the salary and compensation levels every three years. Using the same calculation (40th percentile of full-time salaried employees), the DOL has established an automatic adjustment for January 1, 2020. Do not let this sneak up on you.
If you do not have overtime approval policies and procedures in place, create them. These will help to set a course of expectations and governance to ensure you are compliant with the FLSA. If you do have policies in place, review them, and make necessary adjustments that are in accordance with the new job classifications.
Other considerations to implement include establishing or revising “on call” policies and procedures and reviewing duties to see if you can move tasks around among exempt and nonexempt employees.
Protecting your bottom line while maintaining a high standard of service and care will be challenging with these new rules. However, the proactive business owner who immediately prepares for the FLSA overtime rule changes will be more at ease when December 1 arrives.