Business & Legal Resources (BLR) is recognized by SHRM to offer Professional Development Credits (PDCs) for the SHRM-CP or SHRM-SCP. This program is valid for 1.5 PDCs for the SHRM-CP or SHRM-SCP. For more information about certification or recertification, please visit www.shrmcertification.org.
DOL Overtime Exemption Rule is Final! Understanding Immediate Action Items and Key Compliance Dates
Thursday, June 2, 2016 1:30 p.m. to 3:00 p.m. Eastern
12:30 p.m. to 2:00 p.m. Central 11:30 a.m. to 1:00 p.m. Mountain 10:30 a.m. to 12:00 p.m. Pacific
Presented by:
Burton Fishman, Esq.
Judith E. Kramer, Esq. Fortney Scott, LLC
Nathan D. Woods, PhD Edgeworth Economics
This program has been approved for 1.5 credit hours toward PHR and SPHR recertification through the Human Resource Certification Institute (HRCI). For more information about certification or recertification, please visit the HRCI website at www.hrci.org.
DOL Overtime Exemption Rule is Final! Understanding Immediate Action Items
and Key Compliance Dates Presented by:
Burton Fishman, Esq.Judith E. Kramer, Esq.
Fortney Scott, LLCNathan D. Woods, PhD
Edgeworth Economics
June 2, 2016
Important Legal Notice
These materials are not intended to provide legal advice.
Employers and federal contractors should consult either with their in-house counsel or, as directed, with an experienced employment law attorney for legal advice about whether, based on their specific facts and circumstances, their company complies with the applicable federal and state laws.
2
3
• Background• New Overtime Regulations• Next Steps for Employers
- The Classification Decision
- Setting the Hourly Rate
- Putting it All Together
• Questions
Today’s Program
4
BACKGROUND
Introduction: Who Receives Overtime
• Under the Fair Labor Standards Act (FLSA) all employees are presumed to be eligible for overtime compensation for hours worked in excess of 40 in a workweek, unless they satisfy one of the exemptions
• The proper classification of employees is critical
• Misclassification can result in significant liabilities– If an employee is misclassified as exempt, the employer can be
liable for up to three years of back pay for all overtime worked, plus an equal additional amount as liquidated damages
– Violations of FLSA can result in loss of government contract
5
• Under the FLSA, “white collar” employees (executive, administrative, professional, and computer employees) are exempt from the Act’s overtime requirements if:– Paid on a salary (or fee) basis
– Salary is at least $455/week and
– The employee’s primary duty is performance of exempt duties
• There is a special exemption for highly compensated employees who earn at least $100,000/year and perform at least one of the exempt duties of an executive, administrative, or professional employee
6
Background: Legal Framework
7
NEW OVERTIME REGULATIONS
New Regulations: Announced May 18, 2016
• Major change: salary threshold doubled from $23,660 ($455/week) to $47,476/year ($913/week) for executive, administrative, professional, and computer exemptions• Bonuses – 10% of standard salary threshold can be met by
nondiscretionary bonuses, incentive pay, or commissions if payments made on quarterly basis
• Major change: salary threshold will increase automaticallyevery 3 years
• Highly-Compensated Employees: annual salary level raised from $100,000 to $134,004
• Effective December 1, 2016
8
New Regulations – Threshold Indexed to 40th
Percentile of the Non-Hourly Pay Distribution
• Standard salary threshold and highly-compensated employee (HCE) threshold automatically updated every three years– Beginning 1/1/2020, standard salary threshold raised to
40th percentile of full-time non-hourly workers in lowest-wage Census region
– Beginning 1/1/2020, HCE salary threshold raised to 40th
percentile of full-time non-hourly workers nationwide– In 2020, DOL estimates salary thresholds to be:
• Standard: $51,168• Highly compensated: $147,524• DOL will notify employers of any salary increase no later than 4/4/19
9
However, Future Salary Thresholds Will Likely be Higher than the DOL Estimates
10
CURRENT NON-HOURLY EARNINGS IN THE SOUTH
After 3 Years, Non-Hourly Earnings Assuming One in Four Are Reclassified
11
After 6 Years, Non-Hourly Earnings Assuming One in Four Are Reclassified
12
Proposed Changes that Did Not Make the Cut in New OT Regs
• NO CHANGES TO PRIMARY DUTY TEST!– Rumors that DOL would adopt >50% California test as
primary duty test proved untrue
– Current test remains in effect – for now• “Principal, main, major or most important duty”
– Ensure that all “white collar” exempt employees meet the primary duty test for one of the “white collar” exemptions
13
14
NEXT STAGES FOR EMPLOYERS
15
Best Practices for Complying with the New
Overtime Regulations
1st Step – Seek Expert Advice
• Compliance with the new regulations will require, among other actions, a self-audit
• In order to ensure that this self-audit is done on a confidential basis, it needs to be at the direction of legal counsel, so that it will be protected by the attorney-client privilege
• Applying the attorney-client privilege will typically prevent the employer from having to disclose results if there is litigation or a government audit
16
Multidisciplinary Compliance Team
• Before conducting attorney-client privileged self-audit, enlist and engage multidisciplinary compliance team to evaluate and implement necessary changes required to comply with new regulations:‒ Legal‒ C-Suite‒ Human Resources‒ Finance/ Accounting‒ Compensation, Payroll, Benefits, IT‒ Talent Recruitment and Retention‒ Operations‒ Training
• Develop project plan– Detailed steps to assess risk and decide best options
17
Compliance Options
• Focus on currently exempt employees receiving annual salaries between $23,660 and $47,476 – If you don’t raise salaries by December 1, these employees
will become nonexempt because they will not meet the new salary threshold requirement
• Options:– Increase salaries to meet new exempt salary threshold
– Reclassify employees from exempt to nonexempt
– Restructure workforce/work• Use part-time and/or temporary employees
• Outsource – Independent Contractors
18
Don’t Ignore State Overtime Laws
• Some states adopt federal FLSA to govern overtime
• Other states have different overtime rules, including longer statutes of limitation– FLSA statute of limitation = 2 years; 3 years if willful
– Several state statutes of limitation are longer: e.g., • California: 4 years
• Ilinois, Oklahoma: 5 years
• New York, Maine: 6 years
19
20
The Classification Decision: To Be (Exempt) or Not To Be (Exempt)
Who Will Be Impacted?
• DOL estimates 4.2 million currently exempt workers will become eligible for overtime protection. However…
21
Who Will be Impacted (in Your Firm)?
• Salary ranges can be more narrow within a firm but in the same job employees may be paid differently based on:
– Number of supervised employees
– Tenure
– Location
– Education
– Previous Experience
• Most likely, you need to examine ALL jobs where ANY employees are below the new threshold
22
Hypothetical
• Exempt employee earning $42,500 per year– $42,500 / 2,080 hours = $20.43 per hour
– $20.43 * 1.5 OT premium = $30.65 per OT hour
• If you give the employee a $5,000 raise to meet the new threshold, you are essentially pre-paying for overtime– $5,000 / $30.65 = 163 OT hours (just over 3 hours per week)
• Making this decision hinges on a number of factors
23
The Mix
• Understanding the share of employees in a given job who are over/under the threshold is important
24
Option #1 - Increase Salaries to Meet Salary Threshold
• Considerations– Who should remain exempt?
• Those closest to new salary threshold?• Those working most overtime?• Other considerations?
– Costs• Salary and Benefits
– Impact on workplace culture• Resentment of those who are just below—and just above--
exempt salary threshold
• Ensure that new salary threshold is met
25
Option #1 - Salary Considerations
• If “bumping up” salary, remember – salary threshold will be revised every three years
• Increased salaries need to be in effect on or before new regulations’ December 1 effective date
• Raising some salaries (e.g., currently exempt employees who are slightly below the new salary minimum) may create salary compression and/or pressure for salary increases for additional positions
• If additional work reassigned to still-exempt employees, should they get a raise?
26
Option #1 - Bonuses, Commissions and Incentive Payments
• Bonuses to meet salary threshold– Consider whether to use nondiscretionary bonuses,
commissions and incentive payments to satisfy up to 10% of the required salary threshold
– BUT ONLY if payments are paid at least quarterly• N/A for highly-compensated exemption
– “Catch-up” payment to satisfy threshold• 1st pay period after end of quarter
• Requires care in properly administering
• If the requisite bonus is not paid, all overtime hours for the past quarter are compensable
27
Option # 2 - Reclassify to Nonexempt
• Current exempt employees can be reclassified as nonexempt• Need to implement timekeeping system
– Can be simple or more sophisticated – just accurate and reliable
• May want to restrict overtime to authorized-only– A manager herself may be sent home at 40 hours to maintain
her exemption!• Wage costs can be maintained at previous level
– Calculate regular rate, taking into account overtime premium paid for hours worked over 40
– Consider whether fluctuating workweek or other method to pay overtime is applicable
– Impact on productivity and efficiency• No incentive to work efficiently
29
30
Setting the Hourly Rate for Reclassified Employees
Setting a Base Hourly Rate – It’s Not So Easy
• Assume an employee who is currently earning a salary of $900 per week
31
Does she work 40 hours per week?(assumes no overtime)
$ = $22.50
Does she work in excess of 40 – say 45?(results in a lower base rate)
$ = $20.00
Should we build in OT premium value?(requires that an employee work the 45 hours, in every week, to get back to their pre-reclassification salary)
$. = $18.95
Regular Rate Considerations
• Amount of Overtime• Variation in Overtime• Employee Behaviors• Other Considerations
– Earnings Types
– Paid Time Off
32
Amount of Overtime: The Great Unknown
• Weekly work hours are a critical component of the rate calculation but many firms do not have accurate information about hours worked for exempt employees
• Incorrect assumptions about those hours can have a material impact on the rate calculation so start collecting that information immediately!– Require employees to start tracking hours now (before the regulations
become effective) to provide some baseline prior to the implementation
– Survey employees and/or their direct supervisors about work hours
– Examine alternative data sources (such as building entry and exit security swipe times, computer log-on and log-off times, etc.)
– Perform time and motion studies that observe workers over some period of time
33
Amount of Overtime: It Really Matters
34
• In many jobs, work hours vary according to work load from week to week
• Implications for the amount of overtime worked:– 45 hours per week over 52 weeks means 2,340 work hours per year
and 260 hours of overtime, if every week is identical
– But suppose instead that we see the same total hours apportioned differently, for example to 50 hours for 13 weeks, 48 hours for 13 weeks, 44 hours for 13 weeks and 38 hours for 13 weeks…
– This would give us 286 OT hours instead, or 26 more OT hours
• Variation in weekly hours also alters the timing of earnings to the employees, so employees reclassified under the rule change will earn less in the weeks with 38 hours, even as they (ideally) earn the same amount over the year
Variation in Overtime
35
• Employees may respond in different ways to reclassification, for example:– Increase work hours to increase earnings
– Decrease work hours to have more free time
• Employees’ ability to influence their work time will impact the accuracy of rates based on current hours and earnings
• Don’t discount preconceptions that employees can have about salaried work versus “hourly” work – poor implementation could negatively affect morale, productivity, and/or retention
• Manager incentives’ change as well as concerns about labor budgets may cause newly non exempt managers to be sent home when they hit 40 hours
Employee Behaviors
36
• Earnings Types that can impact the regular rate include:– Bonuses
– Commissions
– Rate/shift differentials
– On-call pay
• Paid Time Off impacts the regular rate calculation so you need to make assumptions about how this time is allocated over the year
Other Considerations
37
38
Putting it All Together
Scenario #1: Assume 42 Hours Worked
39
Scenario #1: Assume 42 Hours Worked
40
Scenario #1: Assume 42 Hours Worked
41
Scenario #1: Whoops, Work Hours Were Under-Estimated
42
Scenario #1:Whoops, Work Hours Were Over-Estimated
43
Scenario #2: Work Hours May Vary
44
Scenario #3: Same Pay, Different Work Hours
45
Communicating Changes
• Communication is key– Establish a communication team and
develop a communication plan• Know who will say what to whom and when
– Per the communication plan, notify employees of impending changes required by new regulations
– Hold meetings; handouts with generic examples
– Identify and train supervisors to respond to individual employee inquiries
– Note universal impact of new rules – every business is affected
46
Training
• Training, training and more training– Managers and supervisors –
• Manage employee morale
• Manage work flow
• Monitor and authorize overtime
• Answer employee questions
– Employees –• Track time (both regular and overtime)
– HR –• Communicate changes and assist in training
47
Additional Considerations for Federal Contractors
• Service Contract Act- Change in salary threshold could increase number of
“service employees”
- If so, Federal contractors whose contracts are subject to the SCA must:• Identify new service employees
• Map new service employees to Wage Determination labor categories or seek conformance
• Pay prevailing wages and benefits
48
Key Takeaways
• Conduct attorney-client privileged self-audit – devote appropriate resources, time and energy to assessing current environment and implications of increased salary threshold
• Take account of potentially large automatic increases to the threshold every 3 years
• For reclassified employees, determine base hourly rate
• Design detailed communication plan • Train all stakeholders – managers, HR and employees• Be mindful of employee morale, corporate culture and other
intangibles! • Don’t ignore state law!• Understand the impact on federal contractors
*This webinar is designed to provide accurate and authoritative information about the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. *This webinar provides general information only and does not constitute legal advice. No attorney-client relationship has been created. If legal advice or other expert assistance is required, the services of a competent professional should be sought. We recommend that you consult with qualified local counsel familiar with your specific situation before taking any action.
Burton Fishman has devoted his practice to developing the "law of the workplace," an interdisciplinary approach that offers employers counsel and representation on a broad range of matters growing out of government regulation of
business. Mr. Fishman is a Fellow in the College of Labor and Employment Lawyers, and was named as a Washington, DC SuperLawyer in 2007 and from 2010 through 2014 in the employment and labor practice by Washington Law & Politics magazine. Mr. Fishman served as the Deputy Solicitor for National Operations for the U.S. Department of Labor during the George H. W. Bush Administration. Mr. Fishman is co-chair (management) of the Federal Legislative Developments Committee of the American Bar Association's Labor/Employment Law Section and serves as a member of its Equal Employment Opportunity Committee. He also is a widely recognized author of over 50 books and articles on workplace issues.
Judith Kramer has considerable experience with the U.S. Department of Labor, where she served for 16 years as Deputy Solicitor for Planning and Coordination, the highest-ranking career employee in the Office of the Solicitor. She provided legal advice to the Solicitor of Labor and other
high-ranking Department of Labor officials on matters relating to wage and hour laws, civil rights and affirmative action, occupational safety and health, mine safety and health, black lung and longshore benefits and administrative law. Ms. Kramer provides clients with extensive expertise on compliance and enforcement matters involving the Department of Labor and other federal agencies.
Burton Fishman, Esq.
Judith Kramer
Dr. Nathan Woods is an expert with a wide variety of experience with analytical topics relating labor and employment matters, class certification, sampling,
extrapolation, and damage estimates. He applies his expertise in the construction and statistical analysis of large, complex data sets to assist clients in analyzing issues related to allegations of discrimination against gender, race/ethnic and age protected groups and all manner of wage and hour topics under federal and various state laws. He also provides guidance on sample design in a variety of contexts, including in healthcare and business disputes.
As an expert witness, Dr. Woods analyzes data and testifies on class action topics involving commonality, typicality, allegations of work "off-the-clock", non-payment of overtime, meal break violations, and issues related to representative sampling, extrapolation and damages.
Outside of litigation, Dr. Woods regularly consults with Fortune 500 clients on a variety of labor and employment and other analytical questions. Among these are economic analyses of wages and benefits issues arising out of collective bargaining agreements, assisting in the implementation and evaluation of large scale diversity initiatives, monitoring compensation, performance and selections and other employment decisions for possible adverse impact, and auditing wage and hour compliance. Dr. Woods often communicates complicated analysis results to affected stakeholder groups, including union membership, management, and legal counsel.
His peer-reviewed academic research focuses on using statistical analysis to answer questions related to race and ethnicity, representation, public opinion, and participation. He has published in the American Political Science Review, the American Review of Politics, Bender's California Labor and Employment Bulletin, the Federal Employment Law Insider, the Journal of Health Care Compliance, the Journal of Politics, the Journal of Urban Affairs, Law360, the National Civic Review, PS, Political Research Quarterly, Social Sciences Quarterly, the Urban Affairs Review, and as chapters in
Nathan D. Woods, PhD
three edited volumes. He frequently writes and speaks on economic and statistical approaches to analysis of class certification, discrimination, and wage and hour questions.
Dr. Woods received his Ph.D. and M.A. degrees in Political Science from the School of Politics and Economics at the Claremont Graduate University and his B.A. in Political Science from the University of California, Davis.
