Should you increase salaries or pay overtime?

Of course, you know the clock is ticking to the December 1, 2016, effective date for new FLSA overtime rules. Have you had time to figure out what’s best for your company? 

There’s a lot to consider. 

Here’s the background. 

On May 18, 2016, the Department of Labor (DOL) issued final rules under the FLSA (Fair Labor Standards Act) that substantially increase the minimum salary requirement for certain exempt employees. The changes to overtime rules affect the classification of non-exempt and exempt employees. Non-exempt employees receive overtime pay past 40 hours per week at 1.5 times their regular rate of pay. 

Exempt employees are salaried employees and are “exempt” from receiving overtime pay. To qualify for exempt status, an employee must satisfy three tests: salary-level, salary-basis, and duties.  

The salary-level test is what’s changing December 1, 2016. It has new thresholds for overtime pay. It will automatically update every three years, beginning January 1, 2020. Here’s the initial pay thresholds: 

•    Regular Employees: The minimum salary overtime pay requirement is increasing from $23,660 to $47,476 annually (i.e., to $913 per week). 

•    Highly Compensated Employees: The minimum salary requirement is increasing from $100,000 to $134,004 annually. 

How does this affect your company? 

So, how many regular employees do you have with salaries between $23,660 and $47,476? How many are currently exempt employees? Do they regularly work more than 40 hours a week? A lot more or just a few? What are their job duties? Do their job duties pass the FLSA Duties Test, qualifying them as exempt employees? 

Would it make business sense for an employee earning a higher wage (but less than the new threshold of $47,476), and who often works long hours, to keep an exempt status? That means raising their salary to the new minimum of $47,476. And expanding their job duties, if necessary, to fit the job definitions in the Duties Test. Or, do you keep their status non-exempt and start paying OT?

Alternatively, are your exempt employees currently earning close to the current $23,600 minimum and rarely work overtime? Do you reclassify them as non-exempt—and pay overtime when it’s incurred? 

Do you have a plan? 

You need a compensation plan that classifies your employees as exempt and non-exempt, in accordance with the new FLSA rules. 
If you’re changing employee classifications, you need a plan to retrain your HR staff and your managers. 

And, perhaps the biggest hurdle, you need an employee communication plan to explain what’s happening. Employee classifications are a reflection on career progress, so it’s important for your employees to feel good about their classifications and future potential. 

Maybe you’re thinking you can let it ride? 

The cost of non-compliance could be more than you want to pay—in time and dollars. 

Although it’s unknown how the DOL or a court will assess damages against an employer who fails to comply with the FLSA rules, here’s what could be at stake if you misclassify employees:

•    Out-of-Pocket Costs: Including back overtime compensation plus an equal amount as “liquidated damages,” post-judgement interest, civil penalties up to $1,100 per person, plaintiff’s attorney’s fees, and costs, and your defense fees and costs. 

•    Legal Ramifications: Including a two-year limitations period or three years for willful violations, future court-ordered compliance, liability for management, and criminal penalties. 

•    Business Impact: Including diversion of resources, the distraction of management and employees, disruption to business operations, and adverse publicity. 

And then, there’s preparing for a DOL audit. Do you know what’s involved in that? Do you have time to find out—let alone do it? 

If ever you needed the right PEO in your corner, it’s now. 

Do you really have time—or on-staff experts—to consider all this regulatory stuff? 

Like I’ve said before, doing it all yourself can work. Lots of small businesses have chosen to bear all the burdens of HR—including trying to stay in front of painful and time-consuming regulations. But, it too often comes at a price—in real dollars and opportunities lost—that’s not worth paying because it sacrifices your business’ growth. 

Let your PEO take care of this for you. They’ll analyze and assess your situation, assist with policy creation and modification, discuss compliance strategies, and provide communications for your managers and employees. 

By partnering with the right PEO, you can focus on what you do best. That’s what will accelerate your business success.