Since its introduction in 1938, the Fair Labor Standards Act, or FLSA, has had a significant impact on the way we work. This landmark legislation established many of the things we take for granted today – a national minimum wage, the 40-hour work week, guaranteed overtime pay for certain jobs and child labor prohibition. And as the needs of the workforce continue to change, the FLSA has evolved in turn, amending regulations to protect today’s workers and impacting the way organizations manage, schedule, deploy and compensate employees.
One of the biggest perennial challenges centers on determining which employees are exempt or non-exempt from the provisions of the FLSA. It is important to understand that all jobs in your organization are non-exempt unless you, the employer, prove otherwise. In order to secure an exemption for a position, they must pass 3 tests:
- Salary Level – Employees must be earning more than $23,660 annually (or $455 weekly).
- Salary Basis – Employees must receive a fixed salary that’s not subjected to reductions based on variance in quality or quantity of work performed.
- Job Duties – The actual duties performed must satisfy one of the duties tests outlined in the Act. The duties tests are for executive, administrative, professional, computer and outside sales employees.
However, proposed changes by the Department of Labor (DOL) to the FLSA will set the minimum salary level at the 40th percentile of weekly wages for all full-time salaried employees in the lowest income census region in the US. This more than double the minimum salary threshold to qualify as non-exempt to $47,476 per year ($913 per week). This also means anyone making less than $47,476 per year would be non-exempt and eligible for overtime compensation.
The minimum threshold for the FLSA’s Highly Compensated Employee (HCE) exemption has also changed. As it stands today, employees performing office or non-manual work who earn $100,000 per year or more are considered exempt. The new regulations would raise this minimum to the 90th percentile (or $134,004) of weekly wages for all full-time salaried employees to be considered an HCE.
Needless to say, these impending changes will have a significant impact on how companies compensate their employees. For instance, they may seek to increase the salaries of select positions to the new minimum of $47,476 to make them exempt, or accept the loss of the exemption for many of their employees and be prepared to increase overtime payments. They’ll also have to determine what to do in a situation where individuals working the same job have different exemption status (based on their pay levels).
With these changes going into effect December 1, 2016, employers are running out of time to figure out the best course of action. So what can you do? Consider the following strategies to comply with the impending changes to the FLSA:
- Inform: The first step is to inform and engage relevant stakeholders (the C-suite, senior leaders in impacted areas and the Finance, HR, IT, Communications and Legal departments) on all changes and timelines. A comprehensive business plan is also needed, addressing what will change and when. This plan would quantify the possible impacted jobs and outline the next steps.
- Understand: Next, the company should conduct impact analysis to feed the planning strategy. This should include understanding how employees might perceive any resulting change, how many people will be affected, and the impacts of raising base pay. It’s also important to quantify the full cost of complying with updates to the FLSA. This could lead to a discussion on how the added costs of increasing salaries or overtime pay will be funded. Being proactive on this issue is essential – don’t wait until the final hours to perform your analysis.
- Plan, Design and Fund: An automatic shift to increase base pay or reclassification of positions could be a quick fix, but the right strategy is one that includes comprehensive due diligence. This should involve finding “lost” dollars to align pay to market, updating scheduling and practices, shifting the hiring strategy accordingly, and using contractors to cover hours. Jobs can also be re-designed to reallocate workload and manage hours.
Given the updates to the FLSA, it is important that businesses don’t underestimate the depth of these changes. Companies should fully understand the impact to the business and develop a plan to update policies and practices accordingly. Committing the time and effort to understand these changes will help to ensure success in this new FLSA environment.
You can start with CompAnalyst’s new feature, Interactive Insights, which can easily calculate the financial impact to your company when you move effected employees to the new thresholds. Click here to learn more about the 2016 summer release or request a demo!