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By Jeff Rummel, Controller and Vice President of Accounting, VGM Group, Inc.

With only two months remaining before the U.S. Department of Labor’s (DOL) final rule revising the “white collar” overtime exemption takes effect, businesses throughout the country should be preparing for the significant changes coming their way.

On May 18, 2016, the DOL issued updates to the Fair Labor Standards Act (FLSA) overtime provisions. The final regulations focused primarily on updating the salary and compensation levels for executive, administrative and professional workers by increasing the standard salary level of full-time employees.  

Companies with gross volume sales greater than $500,000 will have until Dec. 1, 2016, to assess the impact the new rules will have on business and implement a strategy to comply with them. The rules will certainly impose new costs on businesses and require decision makers and those overseeing human resources and financials to incorporate even more analytics into their business planning.

Here’s what you need to know about the new regulations and what changes may be necessary to ensure your business is in compliance.

Key Provisions to the Final Rule

$500,000 Sales Threshold
Some smaller companies may not be affected by the Final Rule. The FLSA applies only to employers with gross volume sales of $500,000 or more, hence, some smaller home medical equipment companies may not be affected.

$47,476 Wage Threshold
To determine which workers should be included in overtime pay requirements – in other words, non-exempt employees – the DOL set the new threshold at the 40th percentile of earnings of full-time salaried workers in the lowest wage Census Region. This results in a new wage exemption of $913/week ($47,476/year), a significant increase from the current rate of $455/week ($23,660/year) that was set in 2004.

Salaried and hourly workers paid below the threshold amount are generally eligible for overtime when they work more than 40 hours per week. However, a new provision in the FLSA allows employers to count a portion of non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent ($4,747/year) of the new standard salary level. For example, an employee with an annual salary of $42,728.40 with at least $4,747.60 in bonuses and commissions would meet the wage threshold. Be aware, however, that these bonuses and incentives must be paid on a quarterly or shorter basis to comply with the FLSA.

Exemption Tests
Employees paid above the threshold amount may be exempt from overtime provided their job descriptions pass “exemption tests.” To exempt an employee from overtime, FLSA regulations require employers to apply three tests in order to confirm they can be excluded:

Salary Basis Test: The employee must be paid a pre-determined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.

Salary Level Test: The amount of salary paid must meet a minimum, specified amount (under the Final Rule: $913/week or $47,476/year).

Duties Test: Employees must pass each prong of the test in order to satisfy the duties test. The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations. The test involves assessing the level of independent decision-making, management of business activities, direction of others’ work, specialized training and/or scope of authority involved in the day-to-day performance of work.

The FLSA will not be making changes to the Duties Test under the Final Rule; however, employers should document the basis for job classifications and plan to review all exempt employees annually.

Tracking Hours Worked

Businesses with salaried employees who fall below the new exempt salary threshold will now be required to have a time-tracking system in place that accurately records work hours. This helps to document and protect against FLSA violations. No specific method for time tracking is mandated; however, the system used “must be accurate and correctly account hours for regular and overtime pay.”  

Reclassifying Employees

To begin, you will need to examine employee compensation and determine who is affected. The impact of the strategies for managing the changes to the FLSA need to be mapped out now so that your business is prepared to navigate the changes on all of these fronts.

The types of HME workers impacted by these regulations will vary among companies but many will fall under a general descriptor of “lead,” “manager” or “supervisor” with common examples such as:

  • Warehouse/distribution manager
  • Billing/reimbursement manager
  • Lead customer service representative
  • Lead therapist
  • Clinical rehabilitation specialist
  • Retail manager
  • Purchasing manager
  • Operations manager

Businesses have some flexibility in how to address the impact the Final Rule has on operations. Upon completion of your payroll audit and exemption tests, employers have several options for reclassifying employees:

  • Employees who fall under the threshold can continue to work over 40 hours per week and be paid at the overtime rate.
  • Employers can limit to 40 the number of hours that employees eligible for the white collar exemption work in order to limit the amount of overtime that will be paid. Those employees who remain exempt from overtime may need to pick up the remaining work in order to meet your business needs.
  • Job descriptions can be redesigned to take into account the new FLSA regulations. Workloads, schedules and duties can be adjusted accordingly to take into account the expected activities of exempt and non-exempt workers.
  • Employees close to the $47,476 threshold may receive a compensation increase in order to continue to work overtime without the need to be paid for it. (Exemption tests must be administered to justify overtime exemption.)

Employers should note that most state laws require a notice of pay change seven to 14 days in advance (30 days in Missouri) for reductions.

Realistic Perspective

It is unlikely these workers will see their take-home pay increase simply because they gained the potential to earn overtime pay. More so, in the wake of changing regulations, many employers will consider a variety of strategies to reduce the additional labor costs in order to remain competitive.

As my colleague Mark Higley, VGM Group Inc.’s vice president of regulatory affairs, stated, “In my analysis of relevant academic research and interviews with industry experts, indications are that many employers will be adjusting compensation schemes to ensure they do not absorb additional labor costs. To do this they might lower hourly rates of pay to leave total pay largely unchanged; cut bonuses, commissions and benefits in order to increase base salaries above the new threshold; and reduce some workers’ hours to fewer than 40 per week in order to avoid paying overtime, cutting compensation proportionally.” 

You may also need to assess the need to end incentive payments or bonus pools for many workers currently eligible for such payments.

On the positive side, the new regulations have presented employers with an opportunity to correct classification issues with reduced risk of potential legal liability. According to employment law attorney Leonard V. Feigel, as reported in cfonewsdaily.com, “The publication of the final rules may provide a hidden opportunity for employers to reclassify some positions that may have changed over the years and may no longer qualify for an exemption.”  

Communicate the Changes

The new regulations will result in many salaried workers being converted to hourly, losing certain benefits and prestige and most likely will view the change as a demotion. 

Employers should instruct managers and employees alike to prepare them for December 1. Create talking points and FAQs to help mitigate potential employee relations issues. Reassure the employee that the reclassification is the result of federal regulations and not a lack of confidence in the employee or their abilities.

In a recent HME NewsPoll, a number of respondents said they plan to change salaried positions to hourly. One respondent commented, “We will likely change the position to hourly, calculate in set overtime and keep the bonus; it will be challenging and will likely be seen as a negative by the employee.”

When making these significant changes, keep an open line of communication between managers and their reclassified employees to help for a successful transition into the new payroll changes.   

Establish Best Practices

The FLSA overtime rules are inevitable. However, by establishing best practices you will position your business to remain compliant, protect your bottom line and be prepared for future adjustments.  

Establish a mechanism for automatically updating the salary and compensation levels every three years. Using the same calculation (40th percentile of full-time salaried workers), the DOL has established an automatic adjustment for Jan. 1, 2020. Don’t let this adjustment sneak up on you.

If you do not have overtime approval policies and procedures in place, create them. These will help set a course of expectations and governance to ensure you are compliant with FLSA. If you have policies in place, review them and make necessary adjustments that are in accordance with the new job classifications.

Other considerations to implement include establishing or revising “on call” policies and procedures and reviewing duties to see if you can move tasks around among exempt and non-exempt employees. 

Protecting your bottom line while maintaining a high standard of service and care will be very challenging with these new rules. However, the proactive business owner who immediately prepares for the FLSA overtime rule changes will be more at ease when December 1 arrives.

For more information about the revised overtime regulations, including the revisions to compensation requirements for highly compensated employees and computer employee exemptions, visit the U.S. Department of Labor online at www.dol.gov/whd/overtime/final2016/.

Jeff Rummel, CPA, is the controller and vice president of accounting at VGM Group, Inc. He is the lead accounting officer with ultimate responsibility for all financial reporting, financial measurement, payroll, treasury, tax and compliance as well as a majority of VGM’s billing, collections, accounts payable, disbursements and financial analysis. He can be reached atJeff.Rummel@VGM.com.