The Department of Labor’s New Overtime Rule

Asking Questions

Anti-Trust PolicyBefore we begin our meeting, please keep in mind that numerous state and Federal laws absolutely prohibit the exchange of information among competitors regarding price, refusals to deal, or agreements to proceed in certain anti-competitive respects, and that no such exchange of this information is either sanctioned by NAMIC or will be permitted during our meeting. This is a very serious matter and your cooperation will be appreciated.

Although The McCarren-Ferguson Act has given a limited exemption to the insurance industry from certain otherwise prohibited activities, board members should realize that the exemption provided companies has definite limits and that NAMIC itself, as a trade association, has no such exemption. Activities, both in and out of the meeting room, are exempt only if they: a) involve the business of insurance; b) are regulated by state law; and c) do not constitute an agreement to boycott, coerce and/or intimidate or an act to further any of the three. Please note that legislative activities are protected by the 1st

Amendment and are generally not subject to anti-trust laws.

Conviction upon violation of the anti-trust laws (Sherman Act, Clayton Act, FTC Act and Robinson-Patman Act) will result in mandatory jail sentences, fines or both, even for first offenders who are otherwise leaders in their communities.

Beside discussions involving any possible insurance market boycott, coercion and/or intimidation, which are never protected under any circumstances, here are some practices which you should not initiate nor participate in as they may expose you, your company, and NAMIC to possible anti-trust investigation and/or prosecution by the FTC or Justice Department. Discussing any of the following:

■ Price, profits, commission, reinsurance or any other cost components and elements.

■ Rates or the stabilizing of rates or other terms or conditions of any products to be offered for sale.

■ Underwriting criteria with an eye toward standardizing.

■ A market division plan without a state law covering the plan, including discussions of type or products to be offered, customers to whom insurance products may be sold or the territories in which they may be sold.

■ Matters that would adversely affect availability of insurance or services to the public.

■ Future rate plans including actuarial projections.

■ “Fair” profit levels.

■ Keeping access to NAMIC membership unduly restrictive or denying unique services of NAMIC to nonmembers.

■ Developing “standards” for company operations.

■ Trading information on bidding for office equipment and supplies or agreeing to collectively refrain from purchasing any equipment, services or supplies from any supplier.

■ Suggesting a certain credit policy.

■ Referring to any company or agency by specific name in any example you may give as an illustration during our discussions.

If any of the above occurs, you should object, have your objection noted in the minutes of any meeting and, if the discussion or practice continues, leave the room. Further, the prohibitions apply to discussions in an informal or social setting, not just regularly scheduled meetings.

If you see any prohibited practices occurring in any NAMIC meeting or social event, please mention your concern to an officer of the Association.

Tom KarolGeneral Counsel, Federal AffairsNational Association of Mutual Insurance Companiestkarol@namic.org

Julie GackenbachPrincipalConfrere Strategiesjulie.gackenbach@confrerestrategies.com

Disclaimer

▸This information is provided as a regulatory update to NAMIC members and is not legal advice.

▸You should seek specific legal advice on federal, state and local requirements before acting with regard to the subjects mentioned herein.

The New Overtime Rules

▸What Are The Rules Now?

▸What Has Changed?

▸What Does This Mean To NAMIC Members?

▸What Can NAMIC Members Do?

Starting at the Beginning. . .Wage & Hour Law

The Fair Labor Standards Act (FLSA) is the federal law that governs wage and hour for private sector and government employees.

The FLSA has three basic requirements:▸Employees must be paid at least federal minimum wage ($7.25) for all hours worked;▸Employees must be paid an overtime premium (at time and one-half the regular rate of pay) for all hours worked over 40 hours in a workweek; and,▸Record keeping.

Starting at the Beginning. . .Wage & Hour Law

▸Non-exempt employees = eligible for overtime▸Exempt employees = ineligible for overtime

SO WHICH EMPLOYEES ARE “EXEMPT”?

For most employees, whether they are exempt or nonexempt depends on:▸ How they are paid▸ How much they are paid▸ What kind of work do they do

1. Salary Basis2. Salary Level3. Job Duties

Exemption from Overtime Depends on 3 Things:

Salary

1. How employees are paid SALARY BASIS

▸Employee must be paid a pre-determined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.

▸No partial day deductions

2. How much they are paid SALARY LEVEL

▸Currently this is $455/week or $23,660 per year

Job Duties3. What kind of work do they do JOB DUTIES TEST

The FSLA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide Executive, Administrative, Professional and outside sales employees. Highly compensated ($100,000 per year/$455 per week) are generally exempt if they regularly perform at least one duty from executive, administrative or professional exemption.

Each category of exemption – Executive, Administrative and Professional - has different required job duties as set forth in the regulations

Dollar Test – Must be compensated on a salary basis of not less than $455 per workweek;

Primary Duty – Must be management of the employer or of a customarily recognized department or subdivision of the employer;

Supervision – Must customarily and regularly direct the work of two or more other employees (FTE’s); and,

Authority to Hire and Fire – Must have authority to hire or fire other employees or whose suggestions and recommendations concerning hiring, firing, advancement, promotion or other change of status is given particular weight.

The Executive Exemption

Dollar Test – Must be compensated on a salary or fee basis of not less than $455 per workweek.

Primary Duty – Must be performance of office or non-manual work directly related to management or general business operations of the employer or employer’s clients, and,

Discretion and Independent Judgment – The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Whether they work for an insurance company or other type of company, insurance claims adjusters generally meet the duties requirements for the administrative exemption

The Administration Exemption

Dollar Test – Must be compensated on a salary or fee basis of not less than $455 per workweek.

Primary Duty – Must be 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.

Common fields of science or learning include medicine, law, theology, accounting, actuarial computation, teaching, engineering, architecture, pharmacy, and various types of chemical, physical and biological sciences.

The Professional Exemption

• Dollar Test – Total annual compensation must be at least $100,000. Of that, at least $455 per workweek must be paid on a salary or fee basis.

• Primary Duty – Must include office or non-manual work, and

• Customary and Regular Duties –Must customarily and regularly perform one or more of the exempt duties for executive, administrative, or professional employees.

The Highly Compensated Employee Exemption

• Dollar Test –Must be compensated on a salary or fee basis of not less than $455 per workweek, OR Must be compensated hourly at a rate of not less than $27.63/hr.

• Primary Duty – Must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field.

▸Note: Employees whose work is highly dependent on or facilitated by the use of computers and computer software are not exempt under this provision unless their primary duty involves the design and development of computer systems, programs, and applications

The Computer Employee Exemption

• Dollar Test – No specific dollar test. • Primary Duty – The employee must

customarily and regularly make sales or obtain orders or contracts for services or for the use of facilities, and,

• Place of Business – The employee must engage in primary duties customarily and regularly away from the employer’s place or places of business.

▸Note: Periodically making sales is not sufficient to qualify for this exemption. Sales work must be the primary duty of the employee.

The Outside Sales Employee Exemption

1. INCREASE OF SALARY LEVEL TEST− to 40th percentile of weekly earnings for full-time salaried worker (for 2016 - $913/week/$47,476/year)

2. INCREASE TOTAL COMPENSATION REQUIREMENT FOR HIGHLY EXEMPT EMPLOYEES (HCE)

− to 90th percentile of weekly earnings for full-time salaried worker ($134,004/year for 2016)

3. ESTABLISH A MECHANISM FOR AUTOMATICALLY UPDATING THE SALARY AND COMPENSATION LEVELS ANNUALLY

− percentage or tied to CPI

Summary of Changes

▸The new regulations increase the salary threshold needed to qualify for overtime exemption from $455/week ($23,600 per year) to $913/week ($47,476/year).

▸These updates will go into effect on December 1, 2016. The standard salary level will automatically update every three years beginning in 2020. The DOL estimates that the salary level will be approximately $984 per week, or $51,168 annually when it resets in 2020.

▸Any business that employs workers with salaries under $47,476 will be directly affected by the new regulations and needs to consider their best course of action for each affected employee.

New Regulations

Any of your salaried "exempt" employees (i.e. currently ineligible for overtime pay) that make less than $913 per week/ $47,476 annually will be re-classified as non-exempt and entitled to overtime when the final rule goes into effect.

also required to comply with the DOL’s record keeping requirements for non-exempt employees:− hours worked each day− total hours worked each week− daily/weekly straight time earnings for the workweek− overtime earnings for the workweek

What Does this Mean?

As a result of this regulation, employers will need to start tracking their salaried employee’s hours who are below the $47,476 threshold.

It’s critical that employers have accurate hourly data and a clear audit trail for when their employees have worked for a few reasons.

▸Accuracy: As a result of this proposed regulation, employers would have to pay their salaried employees for any overtime hours worked.

▸Audit Trail: If an employee reports your organization for not following this regulation, the Department of Labor will come to audit your business.

▸Decision Support: As you consider how you will handle each employee’s labor situation, you will need to have accurate employee time data. The amount of hours they currently work directly impacts how you choose to handle their compensation.

New Regulations

Do Affected Employees Need to Become Hourly Employees?

NO. Hourly is not the same as “non-exempt.”− When properly done, non-exempt employees can be paid a salary

Employers can pay a non-exempt employee any way they want (e.g. hourly, piece rate, salary, commission) as long as:▸the employee receives at least the equivalent of minimum wage for every hour worked in the workweek; and,▸the employee receives overtime pay for any hour worked in excess of 40 in the workweek.

Employers will likely choose one of four options when determining how to handle the DOL overtime changes:

Option 1: Reclassify affected employees.

Option 2: Increase all salaried employees to $47,476.

Option 3: Mandate no overtime at your workplace.

Option 4: Adjust affected salaried employees to an hourly wage.

Consider your Options

Salaried workers directly benefiting from the increase in the overtime salary threshold, by major industry, 2015

Source: Economic Policy Institute.

Salaried workers directly benefiting from the increase in the overtime salary threshold, by major industry, 2015

Source: Economic Policy Institute.

Issues with morale and perception:▸ Employees will often see reclassification as a “demotion”

Many employees prefer being overtime-exempt. It means they don’t have to track their hours—and have more flexibility over when and where they work.

May resist keeping time records or accumulate “hidden” overtime.▸ Plan for how this re-classification will be communicated to affected employees.

Important Considerations

Training newly classified non-exempt employees on:− Timekeeping records and procedures− Complying with meal/rest break requirements− Restrictions on working outside normal work hours, travel time, and other compensable time issues− Deductions for partial-day absences

• Do policies need to be updated or re-written? Are you going to limit the non-exempt duties “off-duty” work? do you need policy changes? (e.g. Email curfew)

Important Considerations

Implications for Employee Benefits▸Many employee benefits are based on the employee’s compensation as the plan defines it, including defined benefit accruals and defined contribution plan employer and employee contributions.

▸In some cases, the plan defines compensation to include overtime pay; in other cases the plan explicitly excludes overtime pay.

▸Employers should review benefit plan documents.

Implications for Employee Benefits▸Retirement plan’s definition of compensation must generally be nondiscriminatory.

▸If a plan does not use a “safe harbor” definition of compensation, for example if the plan defines compensation to mean “base pay,” the plan must test the compensation taken into account to ensure the definition of compensation does not discriminate against lower paid employees.

▸If an employer’s lower paid employees have a greater percentage of pay that is not eligible for retirement benefits or contributions, this could require plan design changes to satisfy the nondiscrimination rules.

▸DOL estimates the average annualized direct employer costs will total between $239.6 and $255.3 million per year dependent on the updating methodology

▸DOL estimates average annualized transfers of higher earnings from employer to employee to be between $1.18 and $1.27 billion

Estimated Costs & Benefits

What Do We Do Now??? AUDIT!

Self Audit – identifying affected employees and possible impact issues− gathering data for compensation analysis− reviewing policies on pay practices, leave, etc. and impact on newly

classified non-exempt employees

Outside Audit− privileged− assist in compiling data and providing legal alternatives on re-classification− golden opportunity to analyze and correct any misclassification . . .

“The law made us do it”

Employers will likely choose one of four options when determining how to handle the DOL overtime changes:

Option 1: Reclassify affected employees.

Option 2: Increase all salaried employees to $47,476.

Option 3: Mandate no overtime at your workplace.

Option 4: Adjust affected salaried employees to an hourly wage.

Consider your Options

Questions?