White Paper: Preparing your business for the new …...new FLSA rules In May 2016, the U.S....

Preparing your business for the new FLSA rules

In May 2016, the U.S. Department of Labor (DOL) took an

action that could impact almost every employer in North

America, regardless of industry or company size. In sum,

the new rule extends overtime protections to millions of

exempt workers who are making less than $47,476 per year.

This increase represents major financial and operational

challenges for employers, who must be fully compliant with

the new rule by December 1, 2016.

This White Paper will summarize how these changes may

affect your organization and what you can do to mitigate

the costs and impact to how you pay and schedule your

workforce.

I. FLSA Overview

01 DECUSOFT WHITE PAPER

The Fair Labor Standards Act (FLSA)

is a federal law that covers minimum

wage, overtime, child labor and

maximum hour provisions of

employment. The statute, which went

into effect in 1938, was part of FDR’s

New Deal program – a series of

sweeping reforms intended to help

the country emerge from the Great

Depression while standardizing

employment conditions in the private

sector. Since 1938, there have been

14 amendments to the FLSA,

including periodic increases in the

minimum wage, expansion of

protection to federal employees and

allowances for employees to sue for

back wages when employers are

found in violation of the Act.

Setting aside state and local issues for

a moment, the FLSA provides two

different ways for coverage to apply:

enterprise coverage and individual

coverage. Setting aside more

complex corporate structures that

can implicate “joint employer” or

similar tests, both coverage tests are

straightforward. For most businesses,

the FLSA enterprise coverage

provisions will apply if the business

meets the following criteria:

1. The business must be involved in

interstate commerce.

2. The business’s gross annual

revenue must be at least $500,000.

If a business meets the above criteria,

then all employees working for the

business are covered – even those

who do not engage in interstate

commerce. Notwithstanding these

limits, the FLSA also automatically

covers some businesses, including

schools, hospitals, nursing homes,

other residential care facilities, as well

as all governmental entities (regardless

of the level of government), no matter

how big or small. While every situation

is different, in order to save time and

potential legal expenses for your

business, it is advised that you

presume the FLSA (and related state

laws) will cover your business and all

of its employees.

Generally, the FLSA allows for employers to exempt employees from said overtime provisions if they pass three tests:

1. The salary threshold level test

2. The salary basis test

3. The duties test

SIMPLE. CONFIGURABLE. ADAPTABLE. 02

The salary threshold level test is the first and most relevant test for purposes of the December 1, 2016 rule change.

As a result of the salary threshold level test, those

employees, regardless of job content, who are found to

be compensated below the threshold level of covered

compensation, including base pay and partial (10%)

bonus/commissions, are considered non-exempt and

therefore must be paid 1.5x their regular rate of pay in a

standard workweek. Next, the salary base test establishes

whether employees are paid a regular, pre-determined

base pay. And third, the duties test ensures that a

majority of the duties of the position exercise discretion

and independent judgment. Incidentally, outside sales

employees are automatically exempt under the FLSA.


On May 18, 2016, the U.S. Department of Labor issued

final regulations under Part 541 of the FLSA. The most

significant change includes a dramatic increase in the

minimum threshold salary level to qualify for the executive,

administrative and professional exemptions to the FLSA

overtime requirements. The final regulations will become

effective on Dec. 1, 2016. At that time, the new minimum

salary level will be $913 per week, which annualizes to

$47,476 per year. This is slightly more than twice the

current minimum salary level of $455 per week, or $23,660

per year. Since the new law has built-in indexing that will

increase the threshold in future years, employers need

to have solid, scalable strategies and tools in place for

updating their compliance practices and implementing

changes, while communicating with employees about the

changes that impact their pay and job responsibilities. For

the first time, though, employers may count commissions/

bonuses (up to 10% of total pay) towards the threshold.

* To be in full compliance, overtime practices, policy changes, payroll calculations and business policies must be in effect by the beginning of the pay period that coincides with Dec. 1, 2016.

As mentioned above, the final rule also establishes “a mechanism for automatically updating the salary and compensation

levels every three years.” Future automatic increases to the salary threshold will occur every three years beginning on Jan. 1,

2020. The salary threshold levels will be updated according to the 40th percentile of earnings for full-time salaried workers in

the lowest-wage Census Region, currently the South. The table below illustrates just how little time companies have to prepare

for these changes.

II. Understanding Overtime Expansion: What’s Changing and When?

Details of the final rule released by the Department of Labor.

Congress has 60 legislative days between the final rule disclosure date and the Dec. 1, 2016 effective date to oppose and dissolve the rule.

If no joint resolution is passed, the final rule goes into effect and employers are expected to be fully compliant with the new rule.

New rules take effect.*

MAY 18, 2016 60 LEGISLATIVE DAYS DECEMBER DEC. 1, 2016


Stakeholders that may be part of your solution include:

■ Payroll: Report time and attendance data for

employees; validate calculations of overtime;

alert management when non-exempt employees

may be working unapproved overtime or nearing

the salary threshold.

■ Compensation/HR Analyst/Manager: Interpret and

educate management on the new rules; manage the

process leading to Dec. 1, 2016 deadline; lead job

analysis efforts in identifying jobs that meet the

duties test to protect their exemption status while

calling out jobs that are exempt, but traditionally

non-exempt, under the FLSA guidelines (e.g., inside

sales); recommend actions to minimize cost to

employer.

■ Legal: When necessary, outside counsel with

specific expertise in employment law may be

brought in.

■ Finance: Accrue for potential expenses of additional

fixed salaries or overtime pay.

to meet thechallenge

IIIForming atask forceRegardless of your company’s size

or structure, a multi-departmental

approach is necessary to meet the

challenge head on. Usually, the

compensation manager, or a similar

role, will take the lead in forming a

team to manage the compliance

actions needed to get ready for

Dec. 1, 2016.

VSteps to Implement...


IV. Audit Process5 Steps to Prepare for the New Rules

Step 1: Ask the following key questions:

1. How many exempt employees (including part-time) do you have making less than $913 per week ($47,476 per year), including commissions/bonuses (can account for 10% of pay)?

2. Do those employees pass the duties test for exempt employees?

3. How much overtime do those employees work?

4. How much would that overtime cost you under overtime expansion?

If you have a Human Capital Management (HCM) technology solution, gathering the answers to some of these

questions may be easier for you. If you do not have an HCM solution, wage and labor reports represent the first

of many instances where technology can support your HR team in planning for workforce changes.

1 Run Reports

2 Validate Exempt Status of EEs

3 Decision

4 Safe Harbors

5 Completion

1. Exempt EEs below threshold2. OT worked by all EEs

If exempt, calculate cost to raise salary to new threshold

Retain salary, reclassify if OT is less than base increase

Annual salary reviews scheduled 2016 –10% of pay can be in commissions/bonuses

Task Force reviews and recommends action by beginning of Dec. 1, 2016 PAY PERIOD


Step 2: Use the data from your audit to establish a plan for offsetting potential costs.

This plan may include electing to raise salaries, transitioning would-be non-exempt employees to hourly pay, or employing a combination of these and other restructuring tactics to limit your liability.

For example, you may need to decide whether you are simply going to divide the current weekly salary by 40, or lower the hourly rate to account for potential overtime in an effort to replicate the current pay and hours. Making decisions that could potentially have a significant impact on your workforce is one of the most difficult parts of the process.

Step 3: Make any necessary changes to policies, job descriptions, procedures and technology.

Your overtime rules for performing work, “off-the-clock,” like checking email or taking phone calls, should be very clear, as noted. Your HCM solution should also let you build customizable training programs to facilitate these changes. People who are not used to clocking in and out will have to start doing so. With that said, it is important to have a scalable time and labor system that can easily accommodate hundreds of new hourly employees. Your time and labor system should allow you to run hourly reports on employees who may be approaching overtime, track employees’ hours based on the job they are performing and help prevent time theft or buddy punching, which could increase with the influx of hourly workers.

Step 4: Create a communication strategy.

Your taskforce should consider how employees in your organization, on an individual basis, would react if their job was reclassified as non-exempt. Most would view it as a demotion of sorts. Prepare a script to address the advantages of such a change, or consider alternative action if such a sentiment is pervasive in your culture. Finance must understand costs, and managers, those on the front lines, must approve OT and ensure compliance with administrative policies. Finally, work out a process to implement and test any workflow changes. For example, ask yourself the following:

■ Will restructuring costs exceed costs to increase salaries for affected employees without restructuring?

■ Does moving non-exempt tasks to lower level employees free up exempt staff to become more engaged in strategic tasks while furthering their career development?

In the end, by addressing long-standing business process issues that would have otherwise negatively restricted talent growth and development could instead lead to increased employee retention. It’s all about conveying the right message – one that employees will respond positively to.

...Your Plan of Action


Class-action wage-and-hour lawsuits are on the rise...

Sources:1, 2 United States Courts, “Federal Judicial Caseload Statistics,”

United States Courts, uscourts.gov/stastistics-reports.3, 4 dol.gov

TechnologyWithin your HCM system, roles can be defined to assign access and approval rights to managers with reports who submit timesheets. Some key items to consider:

• Organizations will want to confirm that reporting relationships are accurate, first.

• Standard workweeks many vary. For example, field employees may work a 40-hour workweek, while HQ staff may be on a 37.5-hour workweek. Straight time should be paid for the 2.5-hour differential before any bona-fide non-exempt employee earns their 1.5x regular rate of pay.

• Alerts can be set up to warn the payroll manager not to pay overtime if a manager has not pre- approved the hours, and policies can reinforce disciplinary action for repeated violations by employees.

Training ManagersAs was the case when employers started confronting sexual harassment on a systemic level, employers today should strongly consider incorporating basic training on Wage-and-Hour compliance into their supervisor training programs. Key training topics should include:

• Basics of state and federal overtime law• The employer’s policies and practices relating to

timekeeping and payroll, and the supervisor’s role in the process

• How to (legally) control overtime• How to spot and prevent potential “off-the-clock”

claims (i.e. ensuring that employees don’t work during unpaid breaks or before or after their shift without appropriate compensation)

• How to handle employee questions and complaints regarding pay issues

VI. Avoiding Noncompliance

$1.5M 2014 21% 2014

DOL-initiatedinvestigations represent

42% of cases.4

Increase in Wage-and-Hour

lawsuits since 2010.2

Wage-and-Hour lawsuits hit record high.3

Average Wage-and- Hour class action

settlement amount.1


Violations/Safe HarborsOwners of companies that fail to comply with the FLSA rules can be liable for any shortfall in wages and liquidation going back three years, which means potentially double damages. To avoid double penalties, employers must show good faith efforts to comply and reasonable grounds. Good faith can mean relying on the advice of outside counsel as it considered developing its policies, even though the net result was a violation of the law. Reasonable grounds defenses rest on the notion that it’s not enough to rely on erroneous advice of outside counsel, but that it did or did not pay eligible employees overtime they were owed under the FLSA.

Important note when it comes to meal periods: The FLSA does not require that employees be paid for “bona-fide meal periods” that are at least 30 minutes long. Employees must be “completely relieved of duties.” So, to avoid any ambiguity, ensure your non-exempt employees clock in and out for meal periods. Also, avoid docking employees for rest periods of less than 30 minutes where the employee is not relieved of work duties.

ConclusionDon’t count on Congress or the President bailing out employers. Regardless of who ends up next occupying the White House, President Obama will be the one to have any veto power over congressional nullification of FLSA rule changes. Given the fact that he charged the DOL with updating the FLSA rules in order to increase employee compensation in the first place, it is very likely that he would veto any congressional legislation negating the changes. Therefore, heeding the old saying, “hope for the best, but prepare for the worst,” certainly applies here. Don’t wait. Implement your compliance plan now to avoid unwanted attention – or, worse, costly penalties for violating the updated FLSA.

Some important links:■ The one law HR and Compensation departments audit for compliance each year (usually): http://www.dol.gov/compliance/laws/comp-flsa.htm ■ FLSA lawsuits hit a record high in 2014: http://www.shrm.org/hrdisciplines/compensation/articles/pages/flsa-suits-hit-record.aspx

©2016 DECUSOFT. ALL RIGHTS RESERVED.

About COMPOSE by Decusoft™COMPOSE by Decusoft™ is a specialized compensation management software solution that simplifies the administration of complex variable pay programs including Merit, Bonus, Short-term and Long-term incentives. COMPOSE is not a modular software suite like other traditional human capital management solutions. However, COMPOSE easily integrates with existing ERP, HRIS, financial and human capital management solutions allowing you to leverage your investment in existing processes and systems.

COMPOSE includes modeling, a workflow approval process, full audit capability, proxy functionality, flexible user preferences, enhanced filtering and sorting, real-time summaries, the ability to manage multiple metrics, total compensation and comprehensive reports.

Visit our website:http://www.decusoft.com/applications/compose/

For a DEMO or to speak with a Product Specialist, contact:201.258.3395 or [email protected]

Decusoft Corporate Headquarters

70 Hilltop Road, Suite 1003Ramsey, NJ 07446

201.785.0775 www.decusoft.com

@decusoft

About DecusoftFounded in 2002, Decusoft is a premier developer of configurable, web-based software solutions including COMPOSE, our specialized compensation management software solution and EasyAdmin, our Taft-Hartley Benefit Fund solution designed from the ground up to make Fund Administration easy.

Decusoft software solutions are backed by exceptional people and superior support. Our team has a proven track record of delivering highly-configurable, practical solutions that address your most complex issues. And, our client-focused approach allows us to partner with you to implement a solution that truly works the way you work.

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White Paper: Preparing your business for the new …...new FLSA rules In May 2016, the U.S....

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