The changes to the Fair Labor Standards Act (FLSA) overtime provision have caused concern among many of our clients.  Questions range from what the changes actually are, who they apply to, and how to prepare for them.  We have compiled answers to a few high level questions that may help you understand the upcoming changes.

What Changes Are Coming?

• The minimum salary level for classifying an employee as exempt from overtime will increase from $23,660 per year ($455 per week) to $47,476 per year ($913 per week).  In addition to meeting this salary level requirement, an employee must still meet the duties test for the white collar exemption to be exempt from overtime.  The duties test has not been changed. (The salary level test does not apply to professionals, including doctors, teachers, and lawyers.)
• The guaranteed salary level for highly compensated employees, who are subject to a simplified duties test, will increase from $100,000 to $134,004.
• Both the minimum salary level and the guaranteed salary level will now be automatically adjusted every three years beginning on January 1, 2020.  The adjustments will be made using the same measures used to establish the current levels.  The minimum level is based on the 40^th percentile of earnings of full-time salaried workers in the lowest wage region of the country (the South.)  The guaranteed salary level is based on the 90^th percentile of full-time salaried earnings nationally.
• Up to 10% of the minimum salary may be met through bonus or commission payments.  However, these payments must be non-discretionary and must be made at least quarterly.  If these payments are not sufficient to make up the gap, the employer may make catch up payments in the quarter immediately following.

When Do These Changes Take Effect?

The changes go into effect on December 1, 2016.  It is important to note that employers must be in compliance by the pay period that includes this date.  

What Should My Business Do to Prepare?

• Assess the impact to your business by determining which employees will no longer meet the salary test and how much overtime these employees typically work. 

• Review job descriptions for those in executive and administrative roles to ensure compliance with the duties test.
• Determine your approach for remaining in compliance.  Options include salary adjustments, restructuring of duties, and beginning to pay overtime to affected employees.
• Reclassify the necessary employees from exempt to non-exempt, keeping in mind that these employees may still be paid a salary and do not have to be converted to hourly pay.
• Deliver message to employees about changes.  Communications with employees should include setting new expectations regarding time-tracking, hours worked, and work conducted away from the office (including answering phone calls and e-mails.)  It is also important to be conscious of potential morale issues.  Employees who see their roles as managerial, but do not meet the salary or duties tests, may feel as if their role is being diminished.  On the other hand, many employees may appreciate the opportunity to either work less or be paid for their overtime.
• Ensure that time-tracking mechanisms are in place.  We recently attended a presentation by an attorney specializing in employment law who emphasized that an employer’s biggest area of exposure is in not tracking hours. Maintaining records of hours worked is the employer’s responsibility.
• Consider whether an adjustment to the work week would alleviate the need for overtime.  For instance, if a case worker often works a standard week and then is on call over the weekend, changing the work week to start on Saturday could resolve this issue.  Weekday hours could be shortened to compensate for the hours worked over the weekend.
• Begin to plan ahead for the change in the minimum salary level that is scheduled to automatically increase every three years.  Adjustments to salary and overtime expense should be built into long range financial plans.

What Else Do I Need to Know?

• Overtime is tracked within a defined work week and comp time may not be used for private employers in lieu of overtime pay.  Comp time is only available to governmental employers.