Unless you've been living under an HR rock for the past couple of months, you probably have heard about the more than doubling of the salary minimum for the white collar exemption from overtime, which will soon be increased to $47,476. I have a client who is fully engaged in the stages of grief over these new overtime rule changes just finalized by the Department of Labor (DOL). At first she was in shock (why haven’t I heard of this before?) denial (Congress will block it) and now she’s angry (where are we supposed to get the money to pay for this?!?).
She knows her organization is going to have to come up with a game plan, so I shared with her these 10 most critical issues HR managers need to consider in order to successfully implement the new rules. Some companies will easily get over this hump, and some will struggle, but we are all going to have to come to terms with these changes, because it looks like on December 1, 2016, they are going into effect. That doesn’t leave any of us much time to plan, so I recommend we all get started on addressing these 10 issues:
- Identifying who is actually over the new salary limit for the so-called “white-collar exemption” from overtime is not as clear-cut as it seems. Up to 10% of the salary amount can consist of non-discretionary bonuses. If a bonus is delivered based on predetermined factors like the company’s performance, then this amount can count for up to 10% of the annual salary amount for determining which employees fit the white-collar exemption. In contrast, if a bonus is not based on pre-announced parameters, but is paid by the employer spontaneously after the fact, then it wouldn’t meet this category.
- Dealing with the situation where a commissioned sales employee falls somewhat short of the limit due to natural fluctuations in earnings. The DOL gives employers the opportunity to make a “catch-up” payment of up to 10% of the base salary amount to the employee at the end of a calendar quarter in order to bring the employee within exempt status for that quarter. The employer has one pay period in which to make the catch-up payment, and if it is not made, then the employee is entitled to overtime pay for the quarter in which she didn’t meet the exemption.
- Deciding whether to raise pay of employees to enable them to qualify for the exemption or reclassify them as non-exempt. It’s relatively simple to do this when you’re looking at single employees, and you can consider their productivity, the type of work they do, and the value they bring to the organization. However, you won’t want to raise salary levels to make one person exempt, while designating another employee non-exempt in the same or a similar role. You also need to consider whether new hires into that role should be paid a higher rate and included in the exempt category. Making the right decision requires a review of not only how your organization looks today, but how it’s likely to grow, and the succession planning and talent acquisition strategies you have for the future. This, all before you even look at the budget you have in place (or not).
- Delivering the news to employees who are being reclassified. If you are raising the rate of pay for your employees, this one seems simple. But when communicating a pay increase, use it as an opportunity to set expectations, express appreciation and confidence, and capture the goodwill that it generates. If, on the other hand, you must tell your team members they are losing exempt status, some of them may be offended, especially if they view the change as a demotion. Carefully and completely explain the situation, including any benefits, such as recaptured time. Finally, if you must tell employees that not only are they being reclassified as non-exempt, but their hourly rate of pay will be reduced to reflect the actual hours they were working while exempt, get ready for some backlash. Be transparent; don’t sugar-coat the message, but do explain the “why” behind it. The company may not have any ability to pay additional compensation in the form of wages, but maybe there are other benefits or opportunities you can highlight to employees. Encourage them through the transition, and remain open to hearing their thoughts on how it’s going, if you’d like to retain your staff.
- Monitoring hours for newly classified non-exempt employees. Ask your soon-to-be reclassified employees to do a “dry run” of tracking their hours each week prior to the implementation date. Low-tech solutions like timecards or spreadsheets can be used for the testing period, but if your organization is of a certain size, you may find it’s more cost-effective to use technology to handle the increase in timekeeping duties. Either way, plan for the HR operations staff time needed to process payroll in an environment where additional hours must be tracked. Documentation is everything, so ensure that all non-exempt employees are accurately tracking, recording, and submitting their time.
- Troubleshooting use of smart phones and other devices by non-exempt employees. According to a 2013 Harvard Business Review article, “60% of those who carry smartphones for work are connected to their jobs 13.5 or more hours a day on weekdays and about five hours on weekends, for a total of about 72 hours.” Remember that whether non-exempt team members have permission to work or not, if they do work, they must be compensated for it under the Fair Labor Standards Act (FLSA). Newly non-exempt employees who have been used to receiving praise for going above and beyond as salaried exempt employees now must be coached not to work smart within the 40 hour workweeks they are allotted, unless overtime is approved. You will need to consider whether it makes sense to continue to allow smartphone use for work among your non-exempt team members.
- Communicating changes to workers that may remove flexibility. Although the DOL is correct that flexibility within a work day or a workweek for non-exempt workers is preserved, in that employees may take off two hours early for an appointment but later work from home for two hours, there will be impacts to some flexibly-scheduled employees, especially those who are working schedules that allow them to flex hours as long as they add up to 80 hours per pay period. The FLSA requires time and a half be paid for each hour in excess of 40 hours in a workweek. So these arrangements suddenly become much more expensive for employers to allow. And don’t forget state law when considering flexibility, because California, for example, has its own rules.
- Swallowing the increased costs that come with paying for work the organization was previously getting within the lower salary level. As mentioned above, it is possible to make this transition at no cost, by determining how many hours your currently exempt employees between today’s salary limit of $23,660 and the new limit of $47,476 are actually working, and divide their current salary by that number of hours to get their new hourly wage when they are converted to non-exempt status. As an example, if I am currently exempt, with a salary of $40,000 per year, and I divide that amount by 52 to get the weekly wage, and then divide again by the 40 hours in a workweek, I get an hourly wage of $19.23. But if I have actually been consistently working 54 hours per week, and my employer instead uses that as my workweek in the calculation, then that hourly wage goes down to $14.25. Caution: in today’s current tight labor market, this is a tough sell, and turnover is expensive (see this EREmedia.com piece for more specifics), so this “cost-free” option may end up costing you tens of thousands of dollars per employee.
- Supporting salaried workers making over the new limit, as extra work gets pushed on them in the effort to avoid additional labor costs. If you’re unable to convert newly non-exempt employees to an adjusted hourly wage, as descried above, you may instead decide to directly convert the salary to an hourly wage when you reclassify your employees, and simply shift the work to those who are currently being paid above the new salary limit for the white collar exemption. This shift in work will certainly affect the outlook of those employees, which could also hurt engagement and retention. The ideal solution will depend on your budget (if any), a thorough analysis of the work activities in the roles, and a candid discussion of the value of the work being performed and its impact on the organization’s bottom line.
- Finding systems and technology to help the organization track time in an efficient and compliant manner. Kronos, ADP and Insperity all have offerings, and if you outsource payroll, you should check with your vendor right away to initiate a review of your data feed and processes, so there are no surprises when suddenly a large group of employees are reclassified. If your organization does not currently have a timekeeping and attendance system in place, toptenreviews.com has a lot of information about several different options, features and cost of systems.
Address these 10 challenges head-on, and you will be more than ready when the rule change goes into effect.
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