Five Tips to Prepare for New Overtime Rules
December 9, 2015
Anyone in HR or payroll leadership roles knows that the Department of Labor (DOL) is proposing rule changes that could have a significant impact on labor costs. The proposed changes to the Fair Labor Standards Act (FLSA) would increase the number of employees who are eligible for overtime by raising the threshold of overtime exemption from $23,660 to $50,440 per year.
These proposed regulations were issued on July 6, 2015, and the DOL accepted comments through September 4. Although recent news reports indicate a ruling may not come until late 2016, no effective date is known. If the proposed regulations are finalized as currently written, it would mean that employees paid below the $50,440 threshold would be entitled to overtime on any work over 40 hours per week.
Below are five tips to help employers mitigate the effects of the upcoming FLSA changes:
1. Check State versus Federal Regulations. Each state may enact regulations that differ from federal regulations. Businesses will be subject to whichever set of directives is more generous to employees.
2. Classify Employees by Salary. Any employees making over the threshold amount ($50,440 or the amount designated in the final regulations) may be exempt from overtime if their job duties primarily involve executive, administrative or professional duties, as defined under the regulations. HR/payroll professionals should make a list of the employees whose salaries do not exceed the threshold because they may be entitled to receive overtime once the changes are enacted. Knowing the extent of the potential impact to labor costs can help business leaders better plan future expenses.
3. Calculate Employee Hours. It's crucial to identify exactly how many hours per week each employee works. If a previously exempt employee made $26,000 annually under the old rules, and actually worked 40 hours per week, then you can convert that salary into an hourly rate equal to their pay, or $12.50 per hour. You would then need to monitor those employees’ work hours proactively with threshold reports and/or scheduling tools to help manage overtime costs and to ensure that any work exceeding 40 hours per week is paid at the appropriate overtime rate. (This is just one example.)
4. Consider Changes to Salaries. Consider a different strategy for employees who make less than the proposed salary threshold, who were previously exempt from overtime and who typically work more than 40 hours per week. For these particular employees, you could raise employees’ base salaries to at least the exemption threshold. To determine if this is a more cost-effective approach, calculate the increased salary and compare it to the estimated overtime costs that would otherwise apply.
Examine these averages across the company’s whole workforce. For example, if the average employee works eight hours of overtime per week at an hourly overtime rate of about $24 per hour, the average overtime paid would be around $10,000 per year. So, you could consider whether or not to increase the base salary of any employees with a base salary of at least $40,000 per year who works the average or more hours. You may want to extend this analysis to anyone with a lower base salary but higher than average historical overtime.
5. Monitor Overtime. In working with the executive team on the company’s business plan, it might be helpful to look at the ebbs and flows of the business and think about seasonal fluctuations – peaks and lulls? After this evaluation, it might be a more cost-effective strategy to hire additional full time, part time or even temporary employees. It’s important to keep in mind long-term goals and consider the possible impact that any planned implementation of automation or technology might have on managing labor costs. For example, global organizations that automate leave and absence management had 33 percent less unplanned overtime, according to a January 2015 report by the Aberdeen Group® titled “Productivity: Managing and Measuring a Workforce.”
An automated scheduling solution can be one important tool for managing overtime. For example, having access to an automatic summary of hours for each employee can help payroll professionals see who is approaching their maximum number of hours, and alert their supervisor to approve the overtime or shift the hours to another employee. This may help balance the number of hours each employee works and potentially minimize or avoid overtime.
Some overtime is unavoidable. Take a realistic look at your company’s existing payroll processes and workforce to determine whether a plan is needed to permit overtime during peak periods. If trends from past years can be identified, it may make sense to reserve funds to accommodate extra overtime hours.
There’s no one-size-fits-all approach to managing the potential impact of the proposed changes in FLSA overtime requirements. However, planning in advance for the upcoming changes may help minimize losses and possibly preserve profitability.
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ADP, LLC is not a law firm, and the information contained in this article is not legal advice. Any discussion of issues are factors you may or may not use in your decision-making process. If legal advice is desired or required, the services of legal counsel are recommended.