LCIA – the member services arm of LCI Workers’ Comp – hosted an “HR in the AM” breakfast event Wednesday for member insureds of the group self-insurance fund, as well as unaffiliated local small businesses. The event homed in on major changes to the Fair Labor Standards Act (FLSA) overtime rules, which will go into effect on December 1st, 2016. To head off confusion about how businesses could be impacted, LCIA invited New Orleans-based attorney Terese M. Bennett to speak on the issue and point employers toward relevant resources.
As Bennett explained, the FLSA is hardly a recent compliance concern for employers large and small. The legislation was passed in 1938 in the midst of the Great Depression; up until then, safety standards and wage laws were often inadequately enforced.
Using that original impetus as a backdrop, Bennett told the crowd of about 40 attendees that it is important to keep the new overtime rules’ policy objectives in mind as they assess which of their employees will be be newly exempt or non-exempt.
What’s the new “white collar” exemption definition?
What are those objectives? First, to ensure workers are provided with “fair pay for a fair day’s work.” Second, to “modernize and simplify” the Act. And third, to ensure that FSLA’s intended protections are fully implemented. In other words, according to Bennett, “to put more money in people’s pockets” for the hours they work – whether they are salaried “professionals” or not.
To claim what is commonly know as the “white collar exemption” for a certain employee, employers use three tests: the salary basis test, the job duties test, and the salary level test. The salary level test is what will change December 1st. Now, an ordinary employee (not computer-related or “highly compensated”) must make at least $47,476 per year ($913/week) in order to be exempt (i.e. ineligible for overtime pay). This is effectively double the previous threshold.
Bennett explained further in her presentation: “President Obama issued an executive memorandum to address this, because what they found was that the previous minimum salary level [for a white collar exemption to overtime pay of at least time and a half] was $23,660 per year – that’s below the poverty level for a family of four.”
Part of the reason that the salary level threshold was so low is due to the fact that the FLSA hasn’t been updated in ten years and went unadjusted for inflation. The new regulations aim to remedy those delays by imposing a three year automatic increase to keep up with inflation. As Bennett noted though, this provision is one of several currently being challenged by a group of 21 states, including Louisiana. However, she encouraged employers to prepare to accept these rules for the current deadline as they are, regardless of the pending decisions.
The changes are significant for many reasons, not the least of which is that most businesses will be affected. “The Department of Labor estimates that 4.2 million workers will now be eligible for overtime under the new rules,” Bennett said. “And that doesn’t include the 2.1 million workers they believe are misclassified to begin with.”
The game plan for employers: preparation and options
While Bennett acknowledged that the changes are overwhelming at first, she gave attendees the step by step rundown of what they can do to get into compliance over the next month:
- Evaluate employees’ current salaries and wages
- Assess the financial impact on the organization as a whole
- Evaluate Independent Contractors (1099s) using the “economic realities test”
- Develop a communication plan to keep morale up among employees that may be re-classified as hourly, or otherwise shuffled
- Seek legal and tax guidance prior to implementing classification changes
Regarding those potential classification and policy changes, Bennett suggested four options. The first and most in accordance with the spirit of the rules is to pay the employee’s salary plus overtime. She noted that this is a particularly good strategy for long-term reliable employees who would consider reclassification as hourly to be a demotion, plus, small employers who cannot afford to pay the $47,476 salary for every one.
The other three options are more complicated. Employers can reclassify some below-threshold employees as hourly and pay a standard amount for each hour worked. Or, they can reduce the employee’s salary to account for the overtime and then explain to the employee is still being paid the same amount in the end. Or finally, employers can altogether prohibit overtime. Bennett urged attendees to tread lightly when manipulating employee pay and classification, as it can ruffle feathers. She also said that overtime must be paid when due, even when there’s a no overtime policy in place and the employee is in violation.