Compliance with the New Federal Overtime Rules; Important Steps

Reviewing employee duties and salaries with upper management is the first step toward compliance
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Changes to the Overtime Laws

Business owners are anxiously working to meet the quickly approaching deadline on December 1,  so that they can meet compliance with the new Federal Overtime Rules. Managers are analyzing what additional resources and tools will need to be put in place. Tools to time track employees now covered by overtime may need to be added. Perhaps you, as an HR manager, are looking at employees that have previously been exempt. You are trying to make the best decisions about the positions and wages. Your accountant is considering the repercussions of raising a few employee’s wages and looking at the effect on other employees. You are also considering how to roll out the new overtime rules to managers and make sure that employees will stay compliant.

Earlier this year, the Department of Labor (DOL) issued the final rules for compliance with the new Federal Overtime Rules. One of the biggest changes to the rules was the raising of the exempt salary threshold from $23,660 to $47,476. Under the Fair Labor Standards Act (FLSA) employees who meet a duties test, aka “white collar” test, and who make above the salary threshold are eligible for exempt status.  Their times doesn’t have to be tracked and they don’t have to be paid for overtime. Employees who fail to meet the duties test and employees who make below the threshold are legally eligible for overtime. There are specific employees who do not fall under this overtime rule. These include mainly teachers, doctors, lawyers and dentists. Employers are required to track and pay for all overtime hours.

Compliance with the new Federal Overtime Rules: Making Decision

There are several important steps for any business to take when seeking compliance with the new Federal Overtime Rules. The first project is to identify which employees are most likely to be affected by the new rules. Make a list of the employees who are currently classified as exempt employees and who make between $23,660 and $47,476. Look at their job titles and check to make sure that they will still meet the duties test if their salaries are raised above the threshold.

The DOL made no changes to the duties test, although it is now understood to be interpreted in a stricter manner. Specifically, a manager’s primary duties should be related to the manager title. The DOL has interpreted this to mean that food shift managers typically do not qualify for the duties test. This is because they often spend the majority of their time preparing food, and not managing, hiring, coaching, etc. It is important to note that changing an employee’s job title to make them appear more exempt will still result in penalties to the employer for mis-classification. The fees and penalties for non-compliance with the new Federal Overtime laws have increased drastically.

Change Salary levels or reclassify employees

Once all the affected employees have been identified and identified by duties, separate them into qualified and non-qualified categories. The employees that do not pass the duties test will need to go to hourly pay. Even if they are above the salary threshold, employees that don’t pass the duties test must be paid for overtime.

The next step toward compliance with the new Federal Overtime Rules is to decide which employees will receive a salary boost. You will also need to decide which will transition to a non-exempt employees. Generally speaking, employees who are currently exempt, but that make below about $42,000 are prime candidates for being converted to a non-exempt status. This means that these employees will then be eligible for overtime pay. One exception would be an employee who regularly works massive amounts of overtime. In this case, a salary raise would still be less expensive than paying overtime on a regular basis.

These employees are the best options for a salary raise

The employees that make between $42,000 and $47,476 are the employees that are most economical to raise pay and avoid paying overtime. However, analyzing current average hours of overtime is important. Employees, or positions, that don’t require regular, or many hours of overtime, even if their salary is close to the new threshold, may not be cost effective to give a salary bump and remain non-exempt.

The employees that are close to the salary threshold may provide benefit to raise their salaries and keep as non-exempt employees. These employees, with a small bump, can continue to work overtime and remain as a non-exempt employee.

Educating employees on the DOL overtime changes and reasons for decisions is vital for employee satisfaction

Educating employees on the DOL overtime changes and reasons for decisions is vital for employee satisfaction

Maintaining Salary compliance

Before proceeding with the step of reclassifying and adjusting salaries, take a moment to look into the next 3, 6 and 9 years. The salary exemption threshold is set to automatically raise every three years. The salary increase is based on the 40th percentile of the lowest wage census region. Therefore, you should look to the future and make sure that you can sustain a salary increase for all employees at or just above the new exemption rate of $47,476. If in the future, you decide that you can’t continue to raise these employees wages and have to turn them to hourly non-exempt employees, it will be at a higher hourly wage than they are now before you raise their salaries. This can add up to quite a bit of extra overtime expenses if you can’t keep up with the salary thresholds.

Rising Tide Effect

Another consideration is not part of maintaining compliance with the new Federal Overtime Rules, As you raise some of your employees salaries to meet the new threshold, you should consider the rising tide effect. Take a look at managers who are higher level or whose positions have higher qualification requirements, but that may be just above the new thresholds. These positions are likely to feel more disgruntled as lower-level employees gain a salary raise if they do not. As you look at and raise employee salaries, continue to look up the ladder and analyze position, educational requirements and current salaries. This can help you to retain higher level managers through these changes.

Ensuring employee growth and motivation

Additionally, take a look a quick look and make sure that any non-exempt employees are not expected to make higher than the new threshold due to overtime pay. Lower level employees who consistently take home more than their exempt managers can lose interest in growing within the company. It can stall the initiative within the business and grow into new positions.

Converting to Non Exempt Employees

Once employees have been identified who need to move from previously exempt to nonexempt, it is vital to communicate the decision immediately. The new deadline doesn’t give much time for businesses to adjust and train. It is vital to not only communicate the changes, but to communicate why. There is a lot of hype around the new overtime rules and many workers are expecting to see pay raises without understanding why. However, for a previously exempt employee, having to clock in and track their hours can feel like a demotion. It is imperative to communicate not only the changes, but the reasoning behind them. Educate employees about the new overtime rules and provide additional resources. Explain why decisions were made for positions. You want to minimize any confusion and resentment around the changes. You will need to have specific answers around position decisions and why those decisions were made.

Educating and training employees on the new rules

As part of the education process, manager of non-exempt employees will need to be trained. This is particularly critical for managers of employees who used to be considered exempt. Employees and managers need to understand that every minute counts. Time spent at home responding to work related calls, emails and texts needs to be tracked. Work lunches and meetings need to accounted for. Additionally, employees need to understand the overtime policy. If prior approval is required, it needs to be clearly defined to employees. This is a good opportunity to redefine and train all non-exempt employees on the new policy, even previously non-exempt employees.

Clear documentation and policies are important to avoid accusations and fines by the Department of Labor

Clear documentation and policies are important to avoid accusations and fines by the Department of Labor

Timekeeping solutions

Finally, employees will need to understand the timekeeping tools in place. Traveling employees can log in by location through GPS time clocks. If your company needs to place additional timekeeping tools or to use workforce management software, contact a SwipeClock representative today for assistance. TIme clocks are not required under the Fair Labor Standards Act, but if your company uses time clocks and an employee stays after scheduled hours to talk or comes in earlier than a scheduled shift, you are not required to pay overtime for those hours.

Document Document Document

The last and more important step for ensuring compliance is to document the changes, training and policies of the company. Documentation can protect your company against discrimination charges from employees that wanted a salary raise instead of going to overtime pay. It can also help to catch any discrepancies in similar role functions but different decisions for individual employees. Documentation should include the why’s of the decisions, the decisions and the training provided for managers and employees. Copies of emails sent to employees to educate them and a record of the training meetings should be kept in the business files.

This will help to protect your business against future allegations and investigations by the Department of Labor. It can also help to save your business thousands of dollars in fines and penalties. If you use a timekeeping solution, make sure that it provides and archives reports that can be accessed. This will be vital if any complaints are made to the Department of Labor. (All of SwipeClock’s timekeeping tools provide automated reporting tools)

Although compliance with the New Federal Overtime Rules is important and can feel overwhelming, it can be accomplished with a little planning. Implement these steps to a smoother transition. Do not assume that you will have a transition time after December 1 to get in compliance. The DOL has been clear that the transition period is prior to December 1st.

For more information about the new Federal Overtime Rules, contact SwipeClock or one of our partners. We also have dozens of articles available on our website.

Written by Annemaria Duran. Last updated October 19, 2016

Simplify HR management today.

Simplify HR management today.

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