Proposed FLSA changes bring added costs, complexity

Employers should already be planning for compliance—are you?

Posted by Lisa Disselkamp on March 31, 2016

The Department of Labor (DOL) has proposed changes to the Fair Labor Standards Act (FLSA)1 that will dramatically increase the number of employees who must be paid on an hourly basis. If the regulations are finalized in the summer of 2016 as expected, employers will have 60–90 days to comply. This is a narrow window given the organizational impacts and the decisions that will need to be made, which can stretch beyond HR to IT, finance, and operations. Now is the time to evaluate the potential effects of the changes and plan your compliance strategy.

Overview of the changes and potential impacts

The DOL is proposing to increase the threshold for employees who qualify for exempt status from $455 per week ($23,660 per year) to $50,440 per year—a 113 percent increase in base pay. The DOL is also proposing to increase the threshold above which highly compensated employees are considered exempt from $100,000 to $122,148.

The DOL anticipates that around 6 million current exempt employees across all industries will be converted to non-exempt status and will be eligible for overtime pay. As a result, their employers will see wage expenses increase—regardless of the actions they take—and may see additional fallout in a number of areas: finances, technology, people, operations, and change management.

Will it take more than 60–90 days for you to plan, design, and fund the following?

  • Financial Costs: Due to salary changes, organizations could face increased pay and benefits costs, leading to questions about where and how to find funds—not only for these added expenses, but also for the cost to update systems that track and manage pay and benefits.
  • Technology Changes: New timekeeping and scheduling systems and tools may have to be introduced, or current systems updated, for these newly classified hourly workers. Both managers and employees may need to be trained on how to use these systems.
  • People Strategy: Reclassifying some positions from salaried to hourly may cause attraction and retention issues and result in additional business costs due to increased employee turnover and reduced productivity due to poor morale. People above and below the impacted roles may also be affected.
  • Operating Model: Daily staffing may have to be changed to reallocate workloads and maintain proper coverage during operating hours. Policies and processes governing scheduling, staffing, travel, and training may also need to be changed as employees are moved from salaried to hourly status. In addition, salary level requirements are expected to be adjusted annually going forward, so employers will need to implement processes to review changes annually to maintain compliance.
  • Change management: Leaders may not have previously managed non-exempt workers, and some employees may feel “downgraded” with a move to non-exempt status. Many newly designated hourly employees are likely to worry about their income. Many employees not directly impacted or enjoying a wage increase are likely to feel overlooked and undercompensated as wages rise around them. Training and communications will be essential to help manage expectations and disruption.

Look beyond the obvious when developing a strategy

Impacted employers have a number of options for dealing with this change. At a minimum, employers should consider first identifying those employees in exempt jobs that don’t meet the minimum salary threshold of $50,440 or the highly compensated threshold of $122,148 and then determine a compliance and deployment strategy. The presumed next steps are rather basic, either (1) keep salaries in these jobs the same and reclassify them as non-exempt and thus eligible for overtime pay, or (2) increase base pay in these jobs to at least the minimum threshold.

A basic analysis will calculate the cost of either of these basic options. However, the optimal next steps will more likely come from a more detailed analysis exploring ways to offset these costs or lessen their impact. For example:

  • Adjusting pay premiums (holiday pay, shift differentials, weekend pay)
  • Sealing payroll leakage points (our experience shows employers could save 2 percent to 2.5 percent of payroll costs by eliminating leakage
  • Redistributing work or shifting duties
  • Redesigning shifts and schedules
  • Exploring the use of outsourced or contract workers
  • Reducing headcount

Our recent webinar, Compliance with 2016 FLSA regulation changes, provides more insights on various compliance strategies and how employers should consider preparing. We encourage you to view the session here.

While there is a chance the proposed changes will not be enacted, there is a high probability they will be and that employers should consider adopting a mindset of “preparing for the inevitable.” The regulations have not been changed in 10 years, and it’s not realistic to think they will stay the same. It is vitally important for employers to examine their exempt/nonexempt employee classifications and have a solid and timely plan for securing the funding to comply, making the necessary changes, and maintaining business continuity.

Lisa Disselkamp, CWAM, is a director in the HR Transformation practice of Deloitte Consulting LLP. Her work focuses on workforce management (WFM) business practice and technology design including timekeeping, labor scheduling, leave management, and labor optimization analytics. She has led large and complex multi-state WFM system assessments and deployments. Lisa has authored three books on WFM systems.

1 US Department of Labor Fact Sheet: Proposed Rulemaking to Update the Regulations Defining and Delimiting the Exemptions for “White Collar” Employees

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