Understanding the DOL’s New Overtime Rules July 2016 Presented by Neckerman Insurance Services

Introduction

Agenda FLSA Overview New Overtime Rule Impact of New Overtime Rule Compliance Examples Developing an Implementation Plan

FLSA Overview

Does the FLSA apply? Step 1: Does an employment relationship exist? Step 2: Is the employer or employee covered by the FLSA? Step 3: Does a joint employment relationship exist?

Covered even if employer is not a covered enterprise FLSA Applicability FLSA coverage is very broad; many employers and most employees are subject to the FLSA. Enterprise Employees Has at least two employees and is engaged in commerce with at least $500,000 in gross annual business Hospitals, residential care facilities and schools Public agencies Involved in interstate commerce (including the production of goods for commerce) Some domestic service workers (housekeepers, full-time babysitters, cooks) Covered even if employer is not a covered enterprise

Overtime Compensation One and a half times the regular wage rate for any hours worked over 40 during a workweek Regular wage rate Average hourly compensation during a workweek Divide employee compensation by the numbers of hours worked during the workweek Hours of work “Suffers or permits” employee to work Includes on-duty and “engaged to wait” time Workweek 7 consecutive 24-hour periods (168 hours)

White Collar Exemptions Executive, administrative and professional employees Outside sales employees Employees in certain computer-related occupations Highly compensated employees Salary Basis Test Predetermined and fixed wages Not subject to reduction due to quality or quantity of work Salary Level Test Minimum salary threshold to qualify for exemption Duties Test Based on the employee’s actual job duties Must match the duties defined by law

Duties Test Executive Manages the enterprise Directs the work of two or more employees Has authority to hire or fire Administrative Does office or non-manual work Directly related to management or general business operations Exercises discretion and independent judgment in matters of significance Professional Learned professional-advanced knowledge in field of science or learning Creative professional-invention, imagination, originality or talent in recognized field of artistic or creative endeavor Computer System analyst, programmer, computer engineer and similarly skilled employees Does not apply to the manufacture or repair of computer hardware or heavy use of computers Outside Sales Salary requirements do not apply Makes sales or obtains orders or contracts for services Customarily and regularly engaged away from the employer’s premises or place of business Highly Compensated Must perform office or non-manual work Must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee

New Final Rule on White Collar Exemptions

White Collar Exemption Final Rule – Effective Dec. 1, 2016 3 Major Changes Salary Level Increase Increase in the HCE Compensation Level to $134,004 annually 10 Percent Bonus/Commission Allowance Allows non-discretionary bonuses and incentive payments to be used to satisfy up to 10 percent of the new Standard Salary Level requirements Automatic Future Salary Level Increases Provides for additional, automatic increases in the Salary Level requirements Effective every three years Increase in the Standard Salary Level to $913 per week ($47,476 annually for a full-year worker)

Final Rule – New Salary Levels Current $455 per week ($23,660 for a full-year worker) Effective Dec. 1, 2016 $913 per week ($47,476 for a full-year worker) Standard Salary Level

Final Rule – Bonuses/Incentive Payments Up to 10 percent Non-discretionary bonuses and incentive payments (including commissions) may satisfy up to 10 percent of the Standard Salary Level. “Catch-up” payment Employers may make one catch-up payment at the end of each quarter to satisfy the Standard Salary Level. Payment must be made within one pay period after the end of the quarter. Standard Salary Level Exemptions only For HCE exemptions, the entire Standard Salary amount must be paid on a salary basis.

Final Rule – Bonuses/Incentive Payments Remaining amount ($91.30 per week) may be paid in nondiscretionary bonuses and incentive payments (including commissions), as long as the payment is made: At least quarterly; and Within one pay period after the end of the quarter. Exempt employee must receive at least $821.70 per week in salary (90 percent of the $913 Standard Salary Level) 10 percent

Final Rule – Bonuses/Incentive Payments Quarterly Assessment Standard Salary Level: Quarterly Minimum 13 weeks x $913 weekly salary = $11,869.00 10 percent / “Catch-up” Payment Option 13 weeks x $821.70 weekly salary = $10,682.10 Difference (Must be paid within one pay period of the end of the quarter) $1,186.90 Maximum Amount Allowable per Quarter in Bonuses/Incentive Payments to satisfy the Standard Salary Level in effect from Dec. 1, 2016 to Dec. 31, 2019

Final Rule – Bonuses/Incentive Payments Quarterly Assessment If paid salary plus nondiscretionary bonuses and incentive payments (including commissions) does not equal the Standard Salary Level for 13 weeks, employer has one pay period to make up for the shortfall (up to 10 percent of the Standard Salary Level). Catch-up Payment Amount only counts toward prior quarter’s salary amount, not toward the salary amount in the quarter in which it was paid. Effect of No Catch-up Payment Employee is entitled to overtime pay for any overtime hours worked during the quarter.

Example – “Catch-up” Payment Calculate Total Amount Paid During the Quarter January February March Total 13 weeks x $821.70 salary $11,182.10 $300 Bonus paid $100 Commission paid Step 1: Quarterly Assessment Subtract Total Amount Paid During the Quarter from the Standard Salary Level Quarterly Minimum Standard Salary Level Quarterly Minimum $11,869.00 Total Paid During Quarter -$11,182.10 Difference $686.90 Step 2: Determine Shortfall Amount Option 1 Pay the employee the difference ($686.90 in the example) within one pay period of the end of the quarter Option 2 Pay the employee overtime for all hours he or she worked above 40 in each of the 13 workweeks Step 3: Make Catch-up Payment or Pay Overtime OR

Final Rule – New HCE Compensation Level Standard Salary $47,476 Additional compensation (at least $86,528) HCE Compensation Level $134,004 Entire amount must be paid on a salary basis Bonuses/incentive payments do not count No “catch-up” payment allowed Annual minimum employers must pay to an exempt white collar employee subject to Minimal Job Duties Test May include bonuses and incentive payments (including commission)

Final Rule – New Salary Levels HCE Compensation Level Current $100,000 per year Effective Dec. 1, 2016 $134,004 per year

Final Rule – New Salary Levels New levels are set as fixed percentiles of the weekly earnings (as established by the Bureau of Labor Statistics) of full-time, salaried workers: New HCE Level 90th percentile (annual equivalent) nationally New Standard Level 40th percentile of lowest-wage Census region (currently the South)

Final Rule – Automatic Salary Level Updates Every 3 years Automatic updates will occur every three years, effective on the first of the year. Jan. 1, 2020 The first automatic update will become effective on Jan. 1, 2020. 150 days before new effective dates DOL will publish updated levels at least 150 days before their effective dates. Federal Register Wage and Hour Division website

Final Rule – Automatic Salary Level Updates Salary levels will automatically update to the same fixed percentiles of the weekly earnings (as established by the Bureau of Labor Statistics) of full-time, salaried workers: HCE Level 90th percentile (annual equivalent) nationally Standard Level 40th percentile of lowest-wage Census region (PROJECTED ESTIMATE)

Impact on Employers

Maintain exempt status Reclassify as nonexempt Compliance Options Exempt employees earning less than $913 per week DEC. 1, 2016 Option 1 Option 2 Maintain exempt status Reclassify as nonexempt Increase salary to at least $913 per week Keep salary and pay overtime at current salary rate Reduce salary so that new wage and overtime hours equal current salary Limit hours of work (no overtime allowed) Redistribute hours of work to other employees Hire additional employees

Employee Reclassification Option 2 Reclassify as nonexempt Employee loses exempt status; and Employee must receive overtime pay for any hours worked over 40 during a workweek Expected Overtime No Yes Limit hours of work No pay change needed No additional cost How often? How many hours?

Expected Overtime Options Reclassify as nonexempt Expected Overtime Manage Hours of Work Limit authorized overtime Redistribute hours of work (among existing employees or new hires) Manage Wages/Salary Fluctuating work arrangements Reduce compensation so that regular wages and overtime equal current salary level

Additional Decision Considerations Consider ALL potential costs and issues, not just cost of salary changes Timekeeping Management Employee Morale Immediate salary costs

Compliance Options: Examples

Examples: Regular Overtime Amy: Creative professional employee $39,000 per year / $750 per week Works an average of 46 hours per week (312 overtime hours per year)

Example: Regular Overtime Option 1 Option 2 Maintain exempt status Reclassify as nonexempt Increase salary to at least $47,476 Pay overtime (Keep current pay after Dec. 1, 2016) Reduce pay $15.31 per hour ($612.40 per week) Estimated cost: $8,476 Estimated cost: $8,776.56 Estimated cost: $9.88

Examples: Occasional Overtime Brad: Exempt administrator $39,000 per year / $750 per week Expected 36 overtime hours per year Occasional overtime

Example: Occasional Overtime Option 1 Option 2 Maintain exempt status Reclassify as nonexempt Increase salary to at least $47,476 Pay overtime (Keep current pay level after Dec. 1, 2016) Reduce pay $18.28 per hour ($731.20 per week) Estimated cost: $8,476 Estimated cost: $1,012.68 Estimated cost: $9.52

Examples: Cost Comparison Amy REGULAR overtime Brad OCCASSIONAL overtime Maintain exempt status Estimated cost: $8,476 Estimated cost: $8,476 Pay overtime Estimated cost: $8,776.56 Estimated cost: $1,012.68 Reduce pay Estimated cost: $9.88 Estimated cost: $9.52

Additional Considerations Maintaining exempt status Budgeting for future salary level updates Paying overtime Cost of additional, unexpected overtime hours Shifting hours Sharing the work Employee skills Timekeeping and management costs Reducing pay Employee morale

Implementation Plan

Implementation Planning Involve Key Personnel Include C-suite, Legal, HR, IT, Payroll and Finance early on Create collaborative teams Consider Costs and Issues Analyzing salaries and duties Cost of increasing salary vs. reclassification (what to pay, how to pay it?) Employee morale Manager buy-in

Develop a Timeline for Compliance (Sample) July – Aug. 2016 Analyze data to identify affected employees. Review job classifications and duties to ensure exempt employees meet duties tests. Consult key personnel (HR, IT, Legal, etc.) to identify specific challenges and issues to consider. Calculate and compare costs of compliance options. Aug. – Sep. 2016 Determine compliance strategy (pay adjustments, job reclassifications, etc.). Develop any new systems needed (timekeeping, management strategy, etc.). Train managers and other key personnel on compliance strategy. Oct. – Nov. 2016 Communicate changes to affected employees. Implement wage/salary adjustments. Implement job reclassifications. Hire and train any additional employees needed for compliance.

Develop a Timeline for Compliance Dec. 1, 2016 (Thursday) Full Compliance Consider implementing full compliance as of the beginning of the pay period that includes Dec. 1, 2016.

Employer Compliance - Automatic Updates Automatic Salary Level Updates The final rule does not require automatic pay raises when the standard salary level increases. However, employers should plan ahead to maintain any white collar exemptions Mark Calendar for Aug. 5, 2019 (at least 150 days in advance) Check Federal Register and Wage and Hour Division website for updated salary levels Plan ahead for salary changes, job reclassifications, etc.

FLSA Training Employees Employment policies (overtime work, off-the-clock work, meals, breaks, travel time, mobile devices, pre/post-shift activities, on-call work) Timekeeping practices Managers and Supervisors Employee classification Timekeeping issues Enforcing overtime policies Handling FLSA risks

Effective Employee Communications Have a communication plan Present to managers and supervisors Designate spokesperson

Ripple Effects Potential Lawsuits Unpaid overtime Improper classification Retaliation claims Compliance NLRB—Protected concerted activity Cost of additional employee benefits Joint liability Timekeeping Meal breaks and rest periods Working off the clock Remote work (mobile devices) Employee morale Salary/work hour reductions Perceived demotion Pay equity

Questions?

Thank you! This presentation is current as of the date presented and is for informational purposes only. It is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Please contact legal counsel for legal advice on specific situations. This presentation may not be duplicated or redistributed without permission. © 2016 Zywave, Inc. All rights reserved.