For nearly 100 years, the Fair Labor Standards Act (FLSA) has provided legal guidance on the treatment of primarily non-exempt workers with regard to minimum wage and overtime. But what once seemed to be carved in stone may be about to change. What does this mean for your company and how will you respond?
The back story seems simple…
In March 2014, President Obama signed a memorandum to the Department of Labor (DOL) to review and update the longstanding FLSA regulations. Proposed regulations were released in June 2015, accepting comments until September of that year. The DOL will finalize and release final regulations in July 2016 with a 60-day grace period allowing employers to comply.
Compliance is not an option—it is required if a company has at least two employees and annual sales of $500,000, to include workers who are "engaged in commerce or in the production of goods for commerce" as well as various other industries (e.g., hospitals, schools, government agencies, etc.). The changes will be enforced by the Wage and Hour Division of the DOL with investigation and fines for non-compliance.
What isn’t changing?
1. The duties test portion of the white collar exemptions of the FLSA does not have significant changes but exceptions like the California rule were up for comment with the DOL—This particular rule deals with percentage of time as it applies to the primary duties test. Some see this example as an indication that other exceptions may be up for discussion.
2. The DOL has stated that it “is not considering expanding the salary level test calculation to include discretionary bonuses.” at this point in time…but under review are non-discretionary bonuses as well as incentive payments – as well as how and can they be applied toward the standard salary test for all three (executive, administrative and professional) levels of exemptions.
What is changing?
1. The threshold salary increase is an increase from $23,660 annually ($455 weekly) to $54,400 annually ($970 weekly). The threshold salary is defined as the minimum salary that must be paid in order to be exempt from FLSA rules.
2. Employees can expect that they will receive either a salary increase to the threshold or their duties may change to impact their exempt status or qualification for OT hours and pay.
3. These rules are in effect no matter the location; this means that locations with less expensive costs of living will have the same threshold as those areas with a higher cost of living.
4. This salary threshold will no longer remain constant year to year but have a rolling adjustment indexed annually. The duties test will remain the same.
What is the impact?
1. This change impacts an estimated five million U.S. workers. Economists have predicted that employers of all sizes will be examining staffing population distributions to try and offset the cost of compliance.
2. The grace period for compliance is 60 days, requiring companies to have a plan ready to act upon later this year.
3. The threat of salary compression is real in many industries, with employee engagement a serious concern for those that are currently at or directly above the new salary threshold.
4. Salary changes are not the only concern. A recent i4cp member discussion on the topic included the issue of perception between an exempt and non-exempt position— how positions are adjusted may also change the perceived importance for a role. Will that change the desirability of some jobs and what message will your company send?
5. Another point of discussion was the question of which route to choose: the salary increase or the OT plan? Each get to the end of the same road, but each route has its own barriers to entry (and completion).
The next steps while we wait…
These are just a few of the challenges that companies need to investigate and devise a plan of action upon in the coming few months. i4cp will continue to follow developments and the ramifications of these changes and how they impact business. i4cp members may access a literature review of recent publications on this topic in the Total Rewards Knowledge Center on our website.
i4cp’s Total Rewards Board, which will hold its inaugural meeting later this year, will deal with questions just like these. For more information contact your Account Manager or Mark Englizian, Board Chair, at firstname.lastname@example.orgNote: The information and interpretations in this post are provided for informational purposes only and not intended to be legal advice. Please consult with your organization's legal counsel for guidance on FLSA specific to your situation.