managing changes in the department of labor’ssahra.shrm.org › sites › sahra.shrm.org › files...
TRANSCRIPT
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Managing Changes in the
Department of Labor’s
Overtime Rules
August 3, 2016
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Agenda
A Quick Review
DOL’s Final Rule
Preparing for Change
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A QUICK REVIEW
Managing Changes in the
Department of Labor’s Overtime Rules
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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]”
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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
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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
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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
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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
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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.
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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
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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.
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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
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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
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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
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Answer the Duties
Tests Candidly
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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
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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
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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
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DOL FINAL RULE
Managing Changes in the
Department of Labor’s Overtime Rules
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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
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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
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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)
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Is $47,476 Reasonable? (higher than ever adjusted for inflation)
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California law for exemption:
at least twice the minimum wage
Bottom line: The salary basis in
California no longer suffices
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“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”
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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.
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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
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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
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Impact of Annual Increases
Source: Edgeworth Economics (August 27, 2015) 29
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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
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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
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IS THERE A PATH TO
STOP OR MODIFY THE FINAL RULE?
Managing Changes in the
Department of Labor’s Overtime Rules
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• 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?
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• 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?
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PREPARING FOR CHANGE
Managing Changes in the
Department of Labor’s Overtime Rules
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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!
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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
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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
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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
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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
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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
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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
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ComplianceHR Has an App for That
Too!
Answer a few questions
regarding salary, bonuses
and hours worked.
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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
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But Are They Working 45 Hours?
• Most exempt employees don’t
punch a clock
• You have only 4 months to figure
it out!
45
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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?
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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?
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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?
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Review Policies and Processes
• Policies
– Off-the-clock work
– Meal and rest break
– Travel time
– Mobile device
• Processes
– Timekeeping
– Payroll changes
– Controlling overtime hours
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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
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Training
• Train the reclassified employees
and their managers
– Wage & hour policies
– Timekeeping procedures
– Activities that are compensable work
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Reclassification Help
All the tools you need to
reclassify employees, with access
to an SME wage-hour attorney,
for one modest fixed-fee
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Questions?
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Additional Information: Helpful Websites
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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
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Additional Information: Quick Reference Chart
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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
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Managing Changes
in the Department of
Labor’s Overtime Rules
Ryan Lockner
Phoenix, AZ
602-474-3652