Events

New proposed Fair Labor Standards Act rule changes: Actions you can take now

Post event Q&A

On June 30, the US Department of Labor issued new proposed regulations for white-collar exemption standards under the Fair Labor Standards Act (FLSA) of 1938. Affecting executive, administrative, and professional exemption tests, the new rules signal a dramatic change to existing guidelines.

On July 20, 2015, Senior Manager Sheila Sever and Director Greg Stoskopf, Deloitte Consulting LLP, and Managing Member Steve Greene, Helms & Greene, LLC, provided an overview of the new standards, compliance strategies, and specific compliance actions companies should consider now. The Dbriefs archive replay, New proposed Fair Labor Standards Act rule changes: Actions you can take now, can be viewed until January 2016.

The audience questions were too numerous to be addressed during the live webcast. Click on the topics below to navigate to the answers.

Event Details:

Event Date
July 20, 2015

Speakers
Greg Stoskopf
Sheila Sever
Steve Greene

TOPICS

Is anything happening with the agricultural exemption? OT after 48 hours?

The proposed overtime exemption regulations will be changing exemptions which apply to agricultural employers. These proposed standards have no impact on those exemption tests.

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Agricultural exemption

Are there a few other fiscal reports or statistics you all suggest we use besides the exempt/salary reports?

Besides looking at which employees that are currently exempt and make under the proposed salary threshold of $970/week or $50,440 per year, you may also want to run reports determining which will cost your organization less - to raise the salary of exempt employees up to the new threshold, or to begin paying overtime to those employees and make them nonexempt. This will depend on how much overtime you project those employees will incur.

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Analysis

When you make a change based on a review of job duties, should the employer attempt to pay the employee back overtime? If so, how far back do you recommend going?

If changes are necessary, exempt status should be modified on or before the implementation date of the new standards. If so, no back pay would be required, as you would be converting individuals to overtime eligibility status on a prospective basis.

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Back overtime

Any thoughts about whether employers might trade increased salary for decreased benefits (such as, employee contributes more to medical insurance premiums)?

As of this writing, many of the employers we have heard from are still in the process of determining the strategy they will pursue to manage both compliance with the new regulations and cost. We do know that employees today look at rewards as a total package, so as employers consider rebalancing the package to manage overall cost, it will be important to keep in mind the real and perceived value of the total rewards package.

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Benefits trade-offs

Does commenting during the comment period create an audit flag for our organization?

It is likely that filing comments will not trigger any increased audit exposure. We understand organizations being concerned about that possibility, and therefore, many comments will be submitted by business associations.

Is DOL considering extending the comment period by additional 60 days?

Many organizations are asking the Department of Labor to extend the comment period by an additional 60 days. Whether the Agency will take that step, would be pure speculation. Many political considerations strongly encourage the administration to get these new standards effective as soon as possible.

What is the likelihood that the annual index and 'one size fits all' approaches will be changed based on public comment on the regulation?

It is not likely that the proposed overtime exemption regulations will be modified in any material way during the public comment period. The DOL in this case held a large number of meetings with business groups in the year leading up to publication of the proposed regulations. The DOL (Agency) telegraphed the changes that we would likely see and already gained significant employer feedback. The Agency knows the problems associated with these changes through those meetings and nevertheless the Agency has moved forward.

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Comment period

How should employers handle the employee communication process for the employees that are changed from exempt to nonexempt? What steps do employers need to take to void legal issues related to this change?

First, be consistent. All similarly situated employees should be treated similarly. Once proposed FLSA status changes are approved, they need to go for legal final review. Communication messaging should be well-thought-out, anticipating the questions that impacted employees will want answered (e.g., Why is this happening? What do I need to do differently? When will this change be effective? What activities count as 'time worked'?). Consistent messaging that has been preapproved by your legal advisors will go a long way toward reducing and/or avoiding legal issues related to the change in the FLSA regulations.

From a communications perspective, it will be important to emphasize the reasons for making the change (due to the update of the regulations) and any points the employer is willing to make about the impact of the change in the FSLA status (typically if going from exempt to nonexempt, that the job is still important to the organization, etc.).

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Communication process / compliance

Is the $970/week limit for nonexempt/exempt before or after Sec 125 benefits are deducted from employee’s wages?

Any Section 125 election by employees, would not be considered a deduction for salary basis purposes. That Section 125 deduction is elected by the employee, and therefore, it would be considered part of the salary.

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Comp that counts toward threshold

Do you have insight as to what other companies will do, i.e., convert employees to hourly and not increase base pay, or convert increase salaries to meet new regulatory requirements?

As mentioned earlier, in our communications with other organizations, it appears that most are still determining the strategy they will pursue and have not stated yet which of these alternatives they will employ.

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Competitive practices

Do the FLSA regulations apply to non-US employees working in the United States? Or, vice versa?

FLSA regulations do apply to all individuals working within the United States, as well as several possessions covered by the federal statute. The standards do not apply to US citizens working in foreign countries.

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Coverage

I thought we heard earlier that there would be less consideration on the duties test and salary test would be the primary trigger?

Yes, in the proposed regulations, the Agency does state that it believes that salary standards are a better predictor of exempt status, than consideration of the duties test. This conclusion is obviously at odds with how the DOL has interpreted the law for at least the past 40 years, but that comment was made in the proposed regulations.

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Duties test

Do you think they will adjust the duties tests to take into account for the evolving environment where technology has automated a lot of the duties that used to qualify, e.g., accounting?

We are hopeful that the DOL will not adjust the duties test during this round of changes. If the Agency modified the duties test, it would not provide more relief or certainty for employers. The duties test refinements being considered by the Agency would all be highly problematic for virtually every industry. So we do not envision changes to the duties test at all, and certainly, no changes in the duties test that would be beneficial to employers.

Do you think that there will be some update to the duty test or it will remain the same?

It is not likely that there will be a change to the duties test, as the DOL could have already included that refinement in the proposed regulations.

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Duties test / comment period

Just as the case with the health care reform, has the DOL/administration considered the possible economic impacts/implications (i.e., possible large corporate restructurings) as a result of imposing the new regulations?

In the proposed regulations the Agency does discuss economic impact associated with the changes, but in terms of increases in employee earnings and benefits. The Agency is not contemplating adverse business consequences in its analysis.

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Economic impact

At the beginning of the webinar, it was mentioned that employers should be prepared for a January 1, 2016, implementation date. This sounds overly aggressive to me. Can you please elaborate?

Yes, for planning purposes, we do think organizations should be prepared for January 1, 2016. It is anticipated to be well in advance of the actual implementation date, but many of these changes do correspond to budget cycles, human resource planning cycles, and the like. Annual planning seems wise, but organizations certainly can plan for a later date.

When is this likely to become a law?

We anticipate that the final regulations will be released during calendar year 2015, and that the standards will become effective sometime during the first quarter of 2016.

Will new comp levels and duties be effective on 1/1 every year?

We are not sure when the new effective dates will be for these annual changes, but we speculate that the annual adjustment will correspond to the implementation date for the new regulations in 2016. If the new regulations become effective March 1 of 2016, we would expect the new compensation levels to be adjusted to March 1 of future years.

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Effective date

Does this now mean that two employees in the same role could have different exemption status—one nonexempt (paid below $50,440) and one exempt (paid above $50,440)? Is there risk to this? Should all employees in the same role have the same exemption?

Yes, employees in the same role performing the same type of work, could be exempt or nonexempt, based solely on compensation level. This legal result does create serious employee relations and compensation administration issues. While not required from a legal perspective, from a human resource leading practices perspective, employees within the same role should be consistently classified as exempt or nonexempt. That may cause us to have to restructure jobs to manage these competing considerations.

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Employees same job different FLSA status

Do the proposed regulations provide any interpretation/clarifications for compensations paid to the employees in the form of equity (e.g., stock options, restricted stock units, stock appreciation rights,)?

The proposed regulations do not address any equity compensation. That compensation would not be considered for the purposes of the new salary test, and it is doubtful that it would be considered for the purposes of the incentive credit introduced by the proposed regulations.

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Equity compensation

If a position is changed from exempt to nonexempt, does the hourly rate have to be based on some legislated conversion rate? i.e., 40 hours assumed? Or can they be based on the current expected work time?

The new rate can be determined based upon the expected work time, and base rates could be computed taking into account anticipated overtime hours worked.

Why not factor in cost of living for each area?

Local costs of living should have been considered, the DOL chose not to for simplicity purposes. The Agency states that it wanted a single figure for all parts of the country, for all industries, and for all sizes of employer.

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FLSA status change

What is the change for highly compensated? What do I need to be looking at?

The change for the highly compensated employee test is to set that annual compensation level at the 90th percentile of wages paid to full-time salaried employees nationally. That figure will also change annually, and for 2016, the compensation level is expected to be $122,148.

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Highly compensated exemption

Could a company just move employees to independent contractor status to avoid the overtime if they make less than $50,440?

No, moving to independent contractor status would not eliminate the exposure. The DOL is well aware of employees classified as independent contractors, and indeed just issued new guidance on that issue within the past month. Moving employees to independent contractor status would increase an organization’s liability.

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Independent contractors

In regards to update job descriptions, do you recommend that the job description indicates the percentage of time per duty?

As a leading practice it is good to include percentages of time per duty on job descriptions. Although based on the regulations as currently proposed this would not be required, this information is helpful from other perspectives, including compensation benchmarking , job analysis, and performance management, where it helps to understand the primary duties of the job and time spent on each.

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Job descriptions

Any exceptions or carve out of the changes for not-for-profit organizations?

These proposed regulations do not contain any exception or special treatment for not-for-profit organizations.

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Nonprofit exception

How does this impact companies with overseas workforce?

These regulations do not apply to foreign employees, unless those individuals work in a possession of the United States already covered by the Fair Labor Standards Act.

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Non-US workforce

Normally the DOL makes you go back two years for misclassification of employees and pay back overtime. Do you expect that to happen with this or will this be somewhat a free window to change and correct now?

Since these new exemption standards will apply prospectively, when individuals are reclassified to nonexempt status, that will not technically trigger liability for past noncompliance. The conversion can be linked to the new tests which apply on a prospective basis.

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OT corrections

Outside sales are excluded in the salary level requirement but is still classified as exempt. Do you see any change in this exemption?

The proposed regulations do not include any changes to the outside sales exemption, and we do not anticipate any in connection with this exercise.

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Outside sales exemption

Are you required by law to include overtime pay as the basis for determining a bonus plan target and payouts? This is a formal bonus plan—not a commission plan

The Fair Labor Standards Act does not dictate how bonus plan targets or payouts are designed by organizations. Employers have the right to define the terms of their bonus plans within their discretion. We would simply recognize that the terms of those plans should be specific, and you should address whether overtime compensation is considered in computing those distributions.

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Overtime calc for bonus

Just wanted to confirm overtime threshold is 40 hours as some executives in my company think it is over 50 hours.

Overtime compensation is triggered at 40 hours in a work week, under the Fair Labor Standards Act.

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Overtime threshold

What is the likelihood that the proposed regulations will incentivize some employers to eliminate full-time positions and replace them with part time?

So, the push to provide 'job sharing' is going to be defunct. However, it is unlikely that part-time categorized employees would be working a full 40-hour week.It is difficult to say, but the new regulations will certainly discourage employers from having nonexempt employees work more than 40 hours in a work week. The full range of industry changes is difficult to predict at this point.

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Part-time schedules

What issues could arise if we classified employees who are currently 'salaried'—but would not pass the new DOL salary test—as 'salaried, nonexempt'?

From a future compliance perspective, we anticipate that many organizations will consider converting current exempt classified individuals to salaried nonexempt status on a go-forward basis. This approach would reduce the employee relations disruptions, even though employees would still be required to maintain an accurate record of hours worked. Other than having to ensure that these individuals do satisfy the requirements for nonexempt employees, moving to salaries, nonexempt status may be the approach for many populations in many organizations.

Our company utilizes salaried nonexempt employees for a number of departments and job titles. We pay OT based on a fluctuating work week. Do we know how will these new rules impact SNE employees?

The fluctuating work week pay plan is accepted under federal law, and you may choose to expand the scope of that plan, for individuals that are currently classified as exempt, but who will not meet the standards on a go-forward basis. The fluctuating work week pay plan is also a compliance option that will make sense to many organizations on a go-forward basis.

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Salaried nonexempt status

If an employer knows approximately how much overtime someone works, can't the employee's salary be lowered to where they will be making the same as what they are currently making?

Yes, when initially setting rates of pay and nonexempt status, that rate can be calculated taking into account the overtime compensation anticipated by the individual.

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Salary adjustment

If a large number of employers choose to increase base salary to $970/week, that will move the 40th percentile mark. Do you think that this will cause salary inflation over time, or only in the first few years of the new system?

Yes, if a large number of employees act as you suggest, that will skew the salary figures for 2017.

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Salary inflation

So, the minimum Salary to be exempt is around $50K/year?

Yes, the new salary level is expected to be $50,440 per year for 2016.

If an employee's salary falls below the salary test but meets the duties test, will this employee not be exempted from OT?

Yes, if an employee’s salary falls below the standard, but meets the duties test, the individual will still be nonexempt. They will be entitled to overtime compensation.

So the new regulations are essentially saying if I have a staff accountant that currently qualifies as a salaried associate but makes less than $50k they will on 1/1/16 become nonexempt?

Yes, unless their salary is adjusted above the standard.

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Salary threshold

Will teachers continue to be exempt automatically, regardless of salary?

Yes.

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Teachers

Many entry level employees will be below the new threshold and end up as nonexempt. When they travel, must they then be paid for the travel time to other cities or different work sites?

Nonexempt employees are frequently entitled to receive compensation for travel time. Those rules are very specific and turn on the nature and character of the travel.

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Travel

Does the salary test apply to over-the-road truck drivers who are paid by mileage rather than base salary or hourly rate?

Most over-the-road truck drivers qualify for an exemption known as the motor carrier exemption (13(b)(1) of the FLSA). That exemption is not impacted by these proposed changes.

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Truck drivers

Meet the host

Gregory Stoskopf

Gregory Stoskopf

Managing Director | Human Capital

Greg is the leader of Deloitte Consulting LLP’s National Compensation Strategies Practice and serves on Deloitte’s Global Rewards Executive Committee. His specialty is focused on the design and implem... More

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