Complying with these sweeping changes means businesses will have to spend more in payroll, administrative and legal fees. So what can you do to help your business control costs?
Recent changes to the nation’s overtime pay rules will make 4.2 million currently exempt workers eligible for overtime pay. According to the U.S. administration, the Department of Labor’s (DOL) changes will help grow middle-class wages and put $12 billion in the pockets of U.S. workers over the next 10 years.
What exactly is changing?
The updated rules double the salary threshold for “white collar” exemptions from the current minimum of $455 per week, or $23,660 a year, to $913 per week, or $47,476 annually. The changes also increase the minimum salary of highly compensated employees from $100,000 per year to $134,004 per year and establish a mechanism for automatically updating the salary and compensation levels for exempt employees every three years.
For the first time, employers may also use nondiscretionary bonuses (generally defined as those announced in advance), incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly.
Complying with these sweeping changes means businesses will have to spend more in payroll, administrative and legal fees.
So what can you do to help your business control costs?
- Evaluate classifications. Employers need to examine role requirements and descriptions of every job to ensure that they thoroughly understand their current employees’ compensation structure, the duties performed, classifications and the rules around the Fair Labor Standards Act exempt versus non-exempt status. Once employers have accurately determined specific roles and duties and how many hours employees are working on a weekly basis, they can start to implement the necessary changes to comply based on the new salary threshold. Any exempt employee who earns greater than the threshold amount ($47,476 under the new rules) may remain exempt from overtime pay if that person primarily performs executive, administrative or professional duties as described in the regulations. Those making less than the threshold should be carefully considered for reclassification.
- Compare the costs of pay options. Employers have several options to consider. If an employee is making $45,000 per year, and is working 55-60 hours a week, it may make sense to raise the employee’s pay and keep the employee classified as exempt, as long as the employee passes the duties test. On the other hand, if an employee’s salary is lower, employers should consider whether they will reclassify the employee as non-exempt and pay him or her overtime when the employee works more than 40 hours a week. In this case, employers may want to consider reducing the employee’s hours if he or she works excessive overtime or consider hiring additional help to cover some of the overtime work at a regular rate of pay rather than time-and-a-half. Other options would include eliminating overtime completely, or reducing an employee’s hourly rate of pay to take into account the overtime hours worked, allowing the employer to maintain the annual rate of pay at the current level, provided the employee still receives the hourly minimum wage. Remember: Many states have their own wage and hour laws. Those states’ regulations may differ from federal regulations, and businesses will be subject to whichever set of directives is more generous to employees.
- Ensure employee hours are carefully monitored. The biggest cost for many businesses is labor, which is why using technology to help with workforce planning is so important. While the DOL doesn’t require that new non-exempt workers use a time-management system, employers must keep time records for each non-exempt employee. Choosing a manual solution could increase errors, which is risky based upon the need to pay employees accurately for all time worked and the potential exposure related to DOL audit requirements and employee pay claims.
One effective method to help manage hours is to implement an automated time and labor management system that continuously tracks time worked, helps companies monitor when an employee nears the overtime threshold, and makes it easier to create more cost-effective schedules.
By using the proper technology, employers can monitor fluctuations and patterns in the volume of work, and align employee schedules accordingly, so that work can get done without creating overtime situations. For example, if an employee makes $16 per hour and works five hours of overtime on average, it costs the company about $5,800 annually. With scheduling tools and overtime analytics, employers can easily track time for that employee, better manage her schedule (and that of her co-workers), and limit overtime to, for example, two hours per week, which would result in a 60 percent savings.
If you already have a time and labor system, make sure that it matches labor supply with the forecasts for demand, offers visibility into workforce shortages and overages, and offers flexibility so employees can apply for leave or swap shifts without a hassle.
Although companies have until December 1, 2016, when the rules take effect to consider these issues, many have not yet started and are still unprepared. According to recent ADP research, only 25 percent of small business owners and 50 percent of midsized employers are aware of and taking action to comply with the new overtime regulations.¹
Taking a wait-and-see approach can be costly, especially when you consider that wage and hour claims are the area with the highest amount of litigation across the employment law spectrum. Much of the financial pain for employers comes from litigation arising from misclassification issues. In fiscal year 2015, for example, there were 10,642 claims for minimum wage violations, with $37.8 million paid out in back wages, and 10,496 claims for overtime violations, with $137.7 million paid in back wages. And this does not take into account any of the administrative costs of litigation.
Given the costs related to noncompliance and how important it is to get these changes right, companies should consider the six-month implementation period provided for the new rules a gift (typically, businesses are given only 60 days to comply with new regulations). So, the time to act is now. To control costs and ensure compliance, start to conduct your workforce analysis, gather data, model financial alternatives, make your business case, and institute the change. Time is of the essence.
For more information about how to remain compliant with the updated rules, visit ADP’s FLSA resource center.
Meg Ferrero is Vice President, Assistant General Counsel, ADP Major Accounts division.
¹Source: Unpublished research from ADP, LLC conducted in 2015. Small business=1-49 employees, Midsized=50-999.