Ever since the Department of Labor issued its proposal to change its rules regarding overtime pay -- by substantially increasing the minimum salary level needed to classify an employee as an exempt executive, administrative, or professional employee -- we’ve been waiting for some sign as to when these new rules will take effect. The Department of Labor originally stated that final rules would come sometime in 2016, but ongoing delays in the process make it clear that we’re now looking at late 2016. And so we wait.
How to handle reclassifying employees and their compensation plans should not be taken lightly. The new rules will impact your business’ budget and compensation processes, and you’ll need significant lead time to address those major changes. No one likes to play the waiting game, so here are a few things you can do right now to prepare for what’s coming:
- Expect to move quickly.
When the Department of Labor last made significant changes to exemption regulations in 2004, the final rules were published on April 23 and took effect just four months later. With the presidential election looming this November, it is a likely that Labor will want to further shorten that lead time so that any final regulations will take effect before the new president takes office. That being the case, if the final rules are issued in late 2016, employers may have only a month or two to comply. Be prepared to act on the new rules with as little as 60 or even 30 days' notice.
- Adjust your salary budget.
The Department of Labor's proposed rules increase the minimum weekly salary for exempt employees from $455 per week to $970 per week. This means that salaried workers earning less than $50,440 annually -- more than double the previous amount -- would be eligible for time-and-a-half pay when working more than 40 hours per week. This is a huge adjustment. While it is possible that political pressure from businesses may cause Labor to fall back to a somewhat lower number, don’t count on it. Your best bet is to assume that $970/week, with annual increases thereafter, will be the applicable minimum salary.
- Expect the unexpected.
During the public feedback stage of planning, Labor asked for comments on some aspects of the current duties tests for executive, administrative, and professional employees. It presumably would not have done so if it wasn’t at least contemplating changes in that area. Therefore, final rules may contain more changes than adjustments to the minimum salary level.
- Figure out your classification and compensation processes now.
In order to comply with the new regulations, you may need to re-classify employees as non-exempt. Despite the promise of overtime pay, this change may not be popular with all employees. Many exempt employees like being treated as exempt, mainly because it offers a level of flexibility in their hours that non-exempt employees do not enjoy. Determining how your workforce is likely to react to these changes and figuring out how best deal with those reactions may be a significant undertaking.
You also have the option of increasing salary levels to meet the newly-established minimum, whatever that turns out to be. However, accomplishing this across an organization without either exploding the compensation budget or creating severe salary compression at the lower levels is going to be an issue. This is of particular concern to businesses with exempt administrators with relatively low salaries who keep irregular hours (e.g., nonprofits). Depending on the size and overall flexibility of your business, you may need significant lead time to decide how to deal with these issues.
Finally, the new exemption rules may require you to look at other actions such as reductions in staff, reorganization and consolidation of positions, or outsourcing certain functions to vendors. Those are not easy decisions to make.
Any of these changes will require significant decision making process. You need to start thinking about how you will deal with the final rules once they are published.
- Clean up your compliance process.
Even if the final rules don't change anything other than the minimum salary for exempt employees, it is a fair bet that they will prompt a spike in HR issues (potentially even litigation) because they draw attention to wage and hour issues. Smart employers will use this time to clean up any potential problems with their policies and practices regarding hours worked. Some firms are installing software that alerts managers when workers are at risk of running up overtime pay, and many employers are now discouraging connection to the office (e.g., checking emails) after working hours. There are many resources available to you. Use this window of time to make the necessary changes for your business.
