May 23, 2016

Implementing the New Overtime Regulations: 5 Steps to Predicting and Controlling Costs (article)

New overtime regulations were unveiled by the U.S. Department of Labor (DOL) dramatically impacting which employees can be classified as exempt or nonexempt, and therefore due overtime for any hours worked more than 40 in a workweek. Employers must comply with the changes by December 1, 2016.

Key changes to the Fair Labor Standards Act (FLSA) include:

  • The minimum salary test for an employee to be exempt from overtime will become $47,476. 
  • The level will increase every three years going forward. 
  • Employers will be able to include nondiscretionary bonuses to satisfy up to 10% of the new salary threshold.
  • The rarely used “highly compensated employee” exemption will now require pay of $134,004, and will also increase every three years.

What Is Still the Same?

While the consequences of the changes are quite dramatic, much of the existing regulation remains intact. Specifically, employees above the $47,476 threshold must still pass one of the duties tests (i.e. executive, administrative, professional, etc.). 

What Do I Do?: 5 Steps to Predicting and Controlling Costs

Companies are seeking to control the costs of implementing the revised regulations in a manner that is consistent with their culture. Employers have numerous options and scenarios on how to comply, each with different costs, pros/cons, employee morale and cultural implications that must be understood and weighed. To this end, the following approach can be used to optimize implementation:

  1. Identify Affected Employees
    Employees previously considered exempt that now fall below the new salary threshold must be identified. This can be easily accomplished through collecting and analyzing the current job and classification documentation, actual employee compensation (salary, non-discretionary bonus, incentive pay and commissions) and current FLSA status. The only real decision point in this step is whether to evaluate based on employee or by entire jobs (in other words, should exempt employees who are above the $47,476 threshold but are in a job with employees below the threshold be included).
  3. Analyze Alternatives
    Too many employers are simply deciding on one of the DOL’s simplistic implementation scenarios and then calculating the associated costs. However, best practices indicate that employers should evaluate all of their options before choosing the best path.  Analyses that could be undertaken include:
    • Zero-cost implementation strategy:  Consider developing an hourly rate for affected employees by dividing their salary by the number of hours currently worked or expected of the position on an annual basis (i.e. perhaps 45 hours a week rather than 40).
    • Increase all employees to the new minimum: Analyze the cost of bringing all affected employees to the new salary test minimum in order to maintain their exemption status.
    • What-if analysis: Conduct analyses to determine the cost of bringing some affected employees to the new minimum while changing others to hourly (perhaps drawing a line at varying levels of pay below the threshold). 
    • Job modeling:  Generally, it is recommended that all employees in the same title have the same exemption status. Model the cost of changing all employees in a title with one incumbent below the threshold to nonexempt.
    • Compression Analysis: Artificially increasing pay for some employees to the $47,476 threshold will almost certainly create compression with the pay of other employees in the same job or other jobs. It is important to identify and address areas of compression before finalizing an implementation plan. 
    • Productivity loss: Consider productivity implications. If formerly exempt employees who fall below the salary threshold are moved to the non-exempt status but capped at 40-hours per week to avoid overtime pay, what is the total value of lost productivity or amount that would have to be paid to hire new employees to replace the loss in productivity?  How does this compare to the cost of allowing the affected employees to work overtime?
    • Long-term projections: The DOL’s methodology for updating the minimum salary threshold may result in nearly exponential growth. Accordingly, an analysis of the organizational impact over the next three, six, nine and 12 years is often an eye opening exercise. It is recommended that a long-term analysis be conducted using both the best and worst case scenarios.  Specifically, the DOL’s update projections are exceptionally conservative and represent the minimum possible impact to employers. The worst case scenario (and in the opinion of the author more likely) is that the minimum salary threshold will grow exponentially resulting in an annual average of 13.3 percent of exempt employees automatically becoming nonexempt. 
  5. Determine Current Misclassifications
    Many organizations have some employees misclassified as exempt from the FLSA.  Because the changing overtime regulations are in the news, perhaps now is the time to clean up any misclassifications without drawing attention to past noncompliance.
  7. Develop Strategies
    Based upon the analyses conducted above, it is time to make a decision. Which implementation strategy, or combination of implementation strategies, best balances your organization’s cultural needs with affordability?
  9. Communicate Changes
     Finally, it is important to provide affected employees with individualized communication explaining how the revised regulation will affect their exemption status and pay, as well as procedures and policies for tracking time.

It is time to begin taking steps to ensure compliance by December 1, 2016. A provider experienced with compensation and human resources consulting may be able to help your company identify how to meet the new requirements with minimal cost. For more information about FLSA compliance, please see our webinar or contact us

Copyright © 2016, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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