I often get asked by clients, prospects, and others in our community what is keeping us busy these days. Recently, Fair Labor Standards Act (FLSA) and the pending regulation changes are a very hot topic. Clients are calling us frequently concerned about the pending FLSA regulations and what that means for their organizations.
What’s Changing with FLSA?
It is our experience, many managers believe exempt status is determined by job title. For example, if an employee is a supervisor, many assume he/she is exempt. In fact, FLSA exemption status has nothing to do with job title and is determined by passing both a series of salary and duties tests.
The proposed rules are mainly focusing on increasing the salary thresholds. While the salary threshold of $23,660 ($455/week) made sense 40 years ago, it has not kept up with the rise in the cost of living. As such, the current Obama Administration has proposed increasing the minimum salary threshold to qualify for exemption status. Public comments are currently being reviewed and we are expecting, when the final rule is published, the new salary threshold will be around $50,440 annually ($970/week). When published, we are also expecting to see automatic annual increases being applied to keep up with the rising cost of living year over year.
In addition, the Department of Labor (DOL) is also evaluating the current minimum annual compensation threshold exempting highly compensated employees (HCE’s) from overtime. The current HCE threshold is at $100,000 and we are expecting the new threshold to be published around $122,148.
What Do the FLSA Changes Mean for Your Business?
If you have conducted a recent FLSA analysis using DOL guidelines and are diligently reviewing position duties regularly, you are most likely in good shape. If you are not doing this, based on our experience conducting many FLSA analyses for our clients, you likely have several employees who are misclassified.
As HR consultants, we have been advising our clients to conduct a FLSA analysis now based on the current rules and determine how they will handle those employees who might be effected once the final rules are published. Essentially taking a before (the regulation takes effect) and after picture. The salary threshold of the exemption test is going to become a much larger factor in FLSA analyses and making the decision now on how you are going to address those effected by the new threshold will make implementation and compliance a much easier task.
What we have found with many of our clients, particularly non-profit clients, is they have employees who pass the duties test and the current salary tests; however, if the threshold is increased, those same employees would not pass the salary test. In these cases you have to determine if you are going to increase the minimum salary for those positions or classify those employees as non-exempt.
We have also found multiple employees who have the same role in an organization and whose salaries fall on either side of the proposed salary threshold. For example, an organization might have two Program Managers; Program Manager A makes $49,000 and Program Manager B makes $53,000. Even though the Program Manager position passes the duties test, Program Manager A would not qualify to be exempt based on salary. What do you do in this case? This is a decision point for you. We recommend either increasing the minimum salary of that position so all employees meet or exceed the salary threshold or classify all employees in those positions, regardless of salary, as non-exempt. Employees may perceive differences in classification as an inequity, if some employees are classified as exempt and others in the same job are classified as nonexempt and eligible for overtime. Perception of inequity could create employee relations issues that would then need to be addressed.
If you do make the decision to increase the minimum salary for these positions, watch for annual increases to the threshold and make internal adjustments as necessary.
The DOL has indicated that once the final rules are published, employers will have as little as 30 to 60 days to implement required changes. Our recommendation is that you conduct a FLSA analysis now and make decisions on how you are going to treat those employees who may fall under or teeter on the minimum threshold so you are able to meet the DOL’s timeframe for compliance.
What if I Don’t Do Anything Now?
Failure to properly classify employees can carry a penalty of up to three (3) years of back overtime wages for each improperly classified position if misclassification was found to be intentional, and two (2) years back pay penalty may be required for general misclassification that is considered unintentional. In addition, government contractors are subject to an additional penalty and potentially threaten their eligibility to be awarded contracts under the Fair Pay and Safe Workplaces Executive Order. A regular audit of positions for accurate FLSA classification shows a good faith effort to ensure compliance with legal requirements for overtime eligibility.
Prepare now. A FLSA Analysis is not a project you can complete overnight. Involve your HR team or engage a third party to help conduct an analysis and make determinations now so when the time comes, you are ready.