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Jun 06, 2016


By: Allison Mann

It has been a long time coming, but the time is drawing near. The changes to the Fair Labor Standards Act (FLSA) are set to take effect December 1, 2016, as stated in the Final Rule published May 18, 2016. The changes have the potential to significantly affect American businesses, small and large. The Department of Labor estimates that it will extend protection to over 4 million workers in its first year of implementation, and the Economic Policy Institute has estimated that it will affect 27.5% of North Dakota salaried workers. It is wise for human resource professionals to start preparing their companies for those changes now—before the changes take effect and their companies are in violation of the law.

The FLSA and its Changes:

First, a quick summary of the FLSA is in order. The FLSA is a federal law that governs the wages and overtime wages of employees in the United States. It sets the federal minimum wage at $7.25, and provides that certain employees (non-exempt employees) are to be compensated at time-and-a-half for any hours worked above forty hours per week. Certain other employees (exempt employees) are not entitled to overtime compensation. In order to be considered an exempt employee, three elements must be met: (1) the employee must be paid a fixed salary not subject to reduction because of quality or quantity of work; (2) the salary must meet a minimum threshold amount; and (3) the employee’s job duties must be primarily administrative, executive or professional.

The most significant change reflected in the Final Rule is a change in the threshold salary amount for exempt workers. The Rule changes the threshold from $23,660 per year to $47,476 per year. It also provides that this threshold amount will be adjusted every three years to account for inflation. This is not the only change the Rule makes, but it is the most significant.

The HR Lesson:

In sum, the change represents a significant expense that many businesses may not be prepared to absorb. However, noncompliance is costly, with civil monetary penalties of up to $1,100 for each violation of the FLSA’s overtime pay provisions.

Case studies are helpful when trying to craft a potential solution. Take for example the fictional ABC, Corp. that pays Jane, a salaried executive $30,000 per year. Jane works on average fifty hours per week. Under the old rule, Jane fits firmly within the exempt category. However, under the Final Rule Jane is nonexempt unless ABC makes a change. ABC may consider the following options:

    • ABC could raise Jane’s salary to the threshold amount. This option may be the simplest, but may also be the costliest. In our above example, it would cost ABC an additional $17,476 per year. In this situation, it is likely not feasible to pay Jane this additional amount for the same amount of work. In other situations, it may be more feasible if the employee’s salary is closer to the threshold amount, which would require a lesser adjustment.

    • Next, ABC may consider limiting Jane to forty hours per week. This is a fairly simple option on the surface, but can quickly become more complicated. Jane likely cannot finish her workload in the forty-hour time limit. Thus, another adjustment would have to be made. Another employee would have to pick up the slack, which may require actually hiring another employee. This option keeps Jane’s salary stagnant, but could require the expense of another full- or part-time salary.

    • Third, ABC could convert Jane from a salaried to an hourly worker. This option requires a bit of math to calculate Jane’s hourly wage, taking into account the extra hours worked. However, it does allow ABC to keep Jane’s $30,000 salary for the same amount of hours worked if the calculation is done correctly (in theory). In our example, Jane’s hourly wage would be roughly $10.91 per hour assuming a fifty-week work year. This amount allows Jane to work fifty hours per week at a salary of $30,000. In application, there are risks to this option. Jane may significantly change her hours worked. There would now be an incentive for Jane to work more than her average of fifty hours per week in order to increase her pay. In addition, she may not like the reclassification. Many employees prefer the salary option and may resist being classified as an hourly worker. In other situations, the average hourly wage of the employee may not actually meet the minimum wage and will require a pay raise.

    • Last, ABC could pay Jane her current salary plus overtime. Here, Jane makes $15 per hour, assuming a fifty-week work year. ABC would have to track Jane’s hours and pay her for overtime at a rate of $22.50 per hour. This option would cost ABC roughly $11,250 per year.

As can be seen in the examples above, each of the potential solutions has its own set of benefits and drawbacks. In addition, this is only using one employee as an example. The issue compounds itself with each additional employee. One option could work great in one situation, but may completely fail in another. Each employer will have to carefully evaluate its business model to see which solution, or mix of solutions, will work best.

One thing is clear. Employers cannot do nothing. The changes are coming, and being in violation of the Act is not an option.

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Reprinted with permission from an article submitted for publication in the June, 2016 Southwest Area Human Resource Association newsletter.