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Managing Changes in the
Department of Labor’s
Overtime Rules
August 3, 2016
Agenda
A Quick Review
DOL’s Final Rule
Preparing for Change
A QUICK REVIEW
Managing Changes in the
Department of Labor’s Overtime Rules
The Fair Labor Standards Act
• Requires employers to pay employees at
least the minimum wage and overtime
pay for work over 40 hours in a week
• Since enacted in 1938, the FLSA has
included exemptions from the minimum
wage and overtime requirements for
executive, administrative, professional
and outside sales employees
• “as such terms are defined and delimited
from time to time by regulations of the
Secretary subject to the provisions of
[the Administrative Procedure Act]”
Who is Covered by the FLSA?
• Private sector employers with $500,000 in revenue or more, or 2 or more employees engaged in interstate commerce
• Hospitals and other health care institutions
• Public sector employers
• Agencies, subdivisions, authorities and districts of state and local government(s)
• Elementary and secondary schools
6
The Rulemaking Process
• March 2014, Memorandum: President Obama directs
Secretary of Labor Perez to revise the overtime regulations
• Summer 2014, Secretary Perez held “listening sessions”
with stakeholders
• July 6, 2015, Wage & Hour Administrator Weil issues the
NPRM, proposing changes to the Part 541 regulations.
• September 4, 2015, the comment period closed after
nearly 300,000 comments were filed, a DOL record
• March 14, 2016, DOL sends Final Rule to White House
Office of Management & Budget for review
• May 18, 2016, DOL publishes the Final Rule
7
Public Comments
• Some employers acknowledged that an increase in
salary level is due, but most said $50,000 is too high
– Some employers suggested a 3 to 5 year phase-in period
• Employers supported counting bonuses towards salary
level, but also stated:
– Commissions should also count
– Bonuses paid quarterly or annually should also count
– Should not be limited to just 10%
• Near universal opposition to annual increases
– Some commenters suggested an alternative of automatic
increases every 5 years
• Employers objected to any changes in the duties tests
because of DOL’s failure to provide sufficient notice
What are
Exempt Employees?
• Employees are exempt from the FLSA’s overtime and
minimum wage requirements if they fall into one of the
below exemptions:
• Executive
• Administrative
• Learned professional
• Creative professional
• Computer
• Outside sales
9
Three Prongs for Exemption Test
• Salary Basis
– Is the employee paid on a salary (as opposed to hourly) basis?
• Salary Level
– Does the employee’s salary meet the minimum requirements?
• Duties
– What are the employee’s primary duties?
Note: Some states have their own requirements as well. California is the most restrictive in terms of the duties test, for example.
10
Executive Duties
• Primary duty is management of the enterprise or of a customarily recognized department or subdivision
• Customarily and regularly directs the work of two or more other employees
• Authority to hire or fire other employees or recommendations as to the hiring, firing, advancement, promotion or other change of status of other employees given particular weight
• In essence, the “managerial” exemption
11
Administrative Duties
• Primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers
• Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance
– This excludes jobs that are simply clerical in nature
• This exemption most commonly applies to employees in human resources, finance, marketing, compliance, employee relations, procurement, etc.
12
Professional Duties
• Learned Professional: Primary
duty is the performance of work
requiring knowledge of an
advanced type in a field of
science or learning customarily
acquired by a prolonged course
of specialized intellectual
instruction
13
Computer Professional Duties
• Applies generally to computer systems analysts, computer programmers, software engineers, and other similarly-skilled professional workers
• Primary duty is: – The application of systems analysis techniques
and procedures, including consulting with users, to determine hardware, software, or system functional specifications
– The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications
– The design, documentation, testing, creation, or modification of computer programs related to machine operating systems
– A combination of the above requiring the same level of skills
14
Sales Duties
• Primary duty – making sales or
obtaining orders for services or
use of facilities
• Customarily and regularly away
from employer’s place of
business
• No salary requirement
15
Answer the Duties
Tests Candidly
16
Why is it Important to Candidly
Answer the Duties Tests?
• Your company could be subject to back
overtime pay for up to 2-3 years
(depending on the circumstances) for any
employee who has not been properly paid
(in addition to state-specific claims and
penalties going back even further)
• Also there is the potential to be hit with
additional civil penalties
• Executives, HR professionals, business
owners, and even managers can be held
personally liable for violations in some
cases
• Willful violators may be prosecuted
criminally and fined up to $10,000
17
Be Careful – Overtime Exemptions Are
Different Under California Law
• Executive/professional/administrative
– Similar to federal exemptions, except
primarily engaged in exempt duties = >
50% of working time
• Inside sales exemption not limited to
“retail or services establishment”
• No highly compensated employee
exemption
18
And Don’t Forget Other Laws…
• In addition to federal and state laws, San Francisco (alone) currently
has at least eleven labor and employment laws that apply only to
employees working within the City:
– Minimum Wage Ordinance
– Retail Workers Bill of Rights
– Paid Sick Leave Ordinance
– Health Care Security Ordinance
– Family Friendly Workplace Ordinance
– Prevailing Wage
– Minimum Compensation Ordinance
– Health Care Accountability Ordinance
– Sweatfree Contracting Ordinance
– Displaced Worker Protection Act
– Fair Chance Ordinance
19
DOL FINAL RULE
Managing Changes in the
Department of Labor’s Overtime Rules
What is NOT Changing
• No changes to the salary basis
test
• No changes that impact outside
sales, teachers, lawyers or
doctors
• No changes to the duties tests
– No changes in the definition of
primary duty
– No changes to the concurrent
duties provision
Salary Basis
• Predetermined amount weekly (or longer basis)
• Not subject to reduction for quality or quantity of work
• Limited ability to deduct for absences
• Not applicable to teachers, doctors, lawyers, or
outside sales
22
New Minimum Salary Level
• Effective December 1, 2016
• $47,476 ($913/week)
• Doubles current $23,660 ($455/week)
• Set at the 40th percentile of weekly earnings for full-time
salaried employees in the lowest wage Census region
(currently the South)
23
Is $47,476 Reasonable? (higher than ever adjusted for inflation)
24
California law for exemption:
at least twice the minimum wage
Bottom line: The salary basis in
California no longer suffices
“Counting” Other Pay In Salary
• Up to 10% of salary requirement can be met with
non-discretionary bonuses, incentive pay, or
commissions, paid at least quarterly
• But remaining 90+% must be paid on a “salary
basis”
25
How Will This Work?
• Must pay on salary basis at least 90% of
minimum salary level – $821.70/week
($42,728.40/year)
• At the end of the quarter (13 weeks), if that
salary plus all bonuses/commissions paid
during the quarter do not equal $11,869
($47,476 ÷ 4), to maintain the exemption, the
employer has to make up the shortfall in the
first pay period of the next quarter OR pay for
all OT in the previous quarter.
Highly Compensated Employees
• $134,004 total annual
compensation
– Up from the current $100,000
– Up from DOL’s proposed $122,000
– Set at the 90th percentile of full-time
non-hourly paid employees
nationwide
• At least $47,476 on “salary basis”
• Balance in non-discretionary
compensation, with annual make-
up pay
• At least one exempt duty
Automatic Increases
• Beginning January 1, 2020, the salary level
will automatically increase every three
years to the 40th percentile of weekly
earnings for full-time salaried employees in
the lowest wage Census region
• Announced at least 150 days before
effective date
28
Impact of Annual Increases
Source: Edgeworth Economics (August 27, 2015) 29
Effective Date
• December 1, 2016
– Typical DOL: yes, that is on a
Thursday!
• But remember, some states
require advance notice to
employees of changes in pay
– Most common is one pay period
– N/A in Arizona, but recommended
– Longest is 30 days in Missouri for
reductions in pay
30
What About State Law?
• 18 States have duties
requirements that differ
from the federal
regulations
• 4 states have a minimum
salary level higher than
the current $455
– Alaska
– California
– Connecticut
– New York
• Employees must be paid
overtime unless exempt
under both the federal
FLSA and State Law
– The higher FLSA salary
level, and
– The more difficult State
duties tests
IS THERE A PATH TO
STOP OR MODIFY THE FINAL RULE?
Managing Changes in the
Department of Labor’s Overtime Rules
• Protecting Workplace Advancement and Opportunity Act
– Introduced March 17, 2016 by Senate and House Republicans;
even if passed, unlikely to withstand President Obama’s veto
– Nullify proposed or final rule
– Prohibit automatic salary increases and changes to duties test
without further notice and comment
• Congressional Review Act
– Requires joint resolution of Congress within 60 legislative days
of publication of the Final Rule
– CRA will not be available for regulations published by May 16
– President Obama would veto
Legislation?
• Litigation Challenge
– There are arguments that DOL does not have authority for the
automatic salary increases and the very high salary level
• New Notice of Proposed Rule Making
– An incoming Republican administration could restart the
regulatory process
– Most likely also would be limited to automatic salary increases
and changes to the duties test
– Difficult to walk back from the salary level increase
Litigation or Regulation?
PREPARING FOR CHANGE
Managing Changes in the
Department of Labor’s Overtime Rules
Preparing for Change
• Bottom line: The new rules are
not going to go away
• Determining who to reclassify
and implementing reclassification
can take up to six months
• December 1st will be here before
you know it
• Don’t wait! Start NOW!
Compliance, Step-By-Step
1. Identify employees who need a
salary increase or to be reclassified
2. Develop new compensation plan
for the reclassified employees
3. Review wage-hour policies and
processes
4. Communicate the changes
5. Train the reclassified employees
and their managers
Audit Current Exempt Employees
• Even if salary level is not an issue, you may have employees who do not meet the duties requirements for exemption under the current regulations
• Rare opportunity to correct classification issues with reduced risk of triggering litigation
• With other employees being reclassified because of the salary issue, reclassifications because of job duties may fly under the radar
38
Job Review Process
• Conduct under the attorney-client privilege
• Review HRIS Data – salaries, bonuses, direct reports, educational degrees
• Review Documents – job descriptions, training materials, performance expectations
• Interview SME managers
• Legal analysis to determine if job duties qualify for an exemption
39
ComplianceHR Has An App For That:
Navigator OT
• A first-of-its-kind online and
intelligent solution delivering
expert level risk assessments
on overtime exemptions at
internet scale and speed
• Results after spending 10 to
15 minutes completing an on-
line questionnaire about job
duties
• Visit compliancehr.com for
more information
Salary Increase or Overtime?
• Pull salary and incentive pay data for all employees earning below $47,476 annual salary – Or, below $42,728.40 annual salary with at least
$4,747.60 in bonuses and commissions
• Calculate the cost of increasing salary to $47,476 – Consider a “re-mix” – lowering incentive pay to offset
salary increase
• Calculate the cost of overtime – How many hours are exempt employees
are working?
– (Weekly salary / 40) * 1.5 * expected overtime hours
Cost-Neutral Solution
Weekly Salary / (40 + (OT Hours x 1.5))
• With a good estimate of expected weekly work hours, applying this formula will provide an hourly rate which will result in the same weekly and annual compensation – Assume $750 salary, 45 hours per week ($39,000/yr)
– Cost-neutral hourly rate • Weekly Salary / (40 + (OT Hours x 1.5))
• $750 / (40 + (5 x 1.5)) = $750 / (47.5) = $15.79
– Cost-neutral salary • Cost-neutral hourly rate x 40 hours
• $15.79 x 40 = $631.60
ComplianceHR Has an App for That
Too!
Answer a few questions
regarding salary, bonuses
and hours worked.
The Overtime Cost Estimator
FREE @ www.ComplianceHR.com
And with one click, compare:
• The cost of a salary increase
• The cost of paying overtime
• The cost-neutral hourly rate
But Are They Working 45 Hours?
• Most exempt employees don’t
punch a clock
• You have only 4 months to figure
it out!
45
Keeping the Exemption
• Budget for the cost of increasing
salaries
• Consider how incentive pay fits in
• Update job descriptions to bolster
exempt classification
• Require employees to certify their job
descriptions are accurate on an
annual basis during performance
review process?
46
Reclassification to Non-Exempt
• How will reclassified employees track their hours?
• What steps can you take to control overtime
hours? (flextime, after-hours work)
• Redistribute workload? (Hire? Push work to part-
time employees?)
• What new/revised policies do you need?
47
Compensation Plan Redesign
• Should we continue to pay reclassified employees on a salary or convert them to a hourly rate?
• Should we adjust the salary level downward or adopt an hourly rate that will minimize additional costs?
• How will we calculate overtime for salaried non-exempt employees? – Divide salary by 40 then pay 1.5 times this rate for all hours
worked over 40
– Divide salary by actual hours worked (not in CA)
– Fluctuating workweek (not in CA)
• Will we continue to provide incentive compensation?
• Do we need to make changes to any benefits?
Review Policies and Processes
• Policies
– Off-the-clock work
– Meal and rest break
– Travel time
– Mobile device
• Processes
– Timekeeping
– Payroll changes
– Controlling overtime hours
Communicate the Changes
• Need to communicate with senior management,
managers of reclassified employees and the
employees themselves
• Key decisions
– Who will communicate the changes?
– What will be communicated?
– How will changes be communicated?
– When will the changes be communicated
• Prepare talking points and FAQs
Training
• Train the reclassified employees
and their managers
– Wage & hour policies
– Timekeeping procedures
– Activities that are compensable work
Reclassification Help
All the tools you need to
reclassify employees, with access
to an SME wage-hour attorney,
for one modest fixed-fee
Questions?
53
Additional Information: Helpful Websites
54
Site Link (copy and paste link into browser)
Department of Labor (DoL) Final Rule on Overtime:
Questions and Answers
https://www.dol.gov/whd/overtime/final2016/faq.htm
DoL Fact Sheet #23: Overtime Pay Requirements of
the FLSA
https://www.dol.gov/whd/regs/compliance/whdfs23.pd
f
DoL Final Rule on Overtime: Questions and Answers
from the General Information Overtime Webinars
https://www.dol.gov/whd/overtime/final2016/webinarfa
q.htm
Additional Information: Quick Reference Chart
55
Current regulations (2004 until effective date
of Final Rule, 2016)
Final Rule
Salary Level $455 weekly $913 weekly
HCE Total Annual
Compensation Level
$100,000 annually $134,004
Automatic Adjusting None Every 3 years, maintaining the standard
salary level at the 40th percentile of full-
time salaried workers in the lowest-wage
Census region, and the HCE total annual
compensation level at the 90th percentile
of full-time salaried workers nationally.
Standard Duties Test See WHD Fact Sheet #17A for a description of
EAP duties
No changes to the standard duties test
From https://www.dol.gov/whd/overtime/final2016/faq.htm on 7/7/2016
Managing Changes
in the Department of
Labor’s Overtime Rules
Ryan Lockner
Phoenix, AZ
602-474-3652
