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THE SALARY SLAM: Exempt or nonexempt, expect salaries to shoot up based on the new FLSA overtime requirements

Posted on: August 15th, 2015 | Category: Government Regulatory & Compliance Issues, Our Blog

An Employer’s Guide to the Proposed FLSA Overtime Regulation Changes
Part 2

DOL and HR - myHR Blog

Last week, we began our series on the Department of Labor’s (DOL) newly proposed changes to the Fair Labor Standards Act (FLSA) overtime regulations, which came out in late June and will impact 11 million American workers. These proposed changes are a big concern to human resources professionals and employers all over the country, who are still trying to wrap their heads around what they might be expected to do to remain compliant—and profitable—if and when the regulations go into effect.

As we all wait and see what the DOL finally does with these proposals, myHR Partner has put together this three-part series on the matter for our myHR Blog. We hope it helps you keep better informed about the FLSA overtime regulations being proposed so that you can best prepare for what may come in the months ahead.

THE SALARY SLAM: Exempt or nonexempt, expect salaries to shoot up based on the new FLSA overtime requirements.

Brace yourself. Salaries are going to go up if the recently proposed FLSA overtime requirement changes go into effect.

Here is your second cautionary alert about the proposed FLSA requirement changes:

Currently for an employee to be exempt, one of the requirements is that he or she must make more than $455/week, which comes out to $23,660 annually. The proposed FLSA requirement changes would set the new standard salary level to whatever the 40th percentile of weekly earnings for full-time salaried workers is. According to the Society of Human Resources Management (SHRM), in 2013 that would come out to $921 per week, or $47,892 annually.

From a special report from the SHRM HR Policy Action Center projecting out three years from the SHRM figures to 2016 levels:

If the 40th percentile approach is adopted, the 2016 level is projected to be $970 a week, or $50,440 annually. This will impact all sectors but it will disproportionately affect the non-profit and service sector industries as well as certain geographic areas of the country.

It is easy to see, as SHRM points out in it’s report, that doubling the salary threshold will significantly impact businesses across the board, and that non-profits and companies with smaller profit margins to begin with will be especially strained by such a large, sudden increase in salary costs. But doing so can also affect employees in unexpected ways.

FLSA overtime changes 2015 myHR BlogTake for example, this scenario: because an employer can’t afford to pay all their employees overtime under a new system that would reclassify them as nonexempt, the company doesn’t increase the employees’ salaries to meet the exempt criteria. Instead, it reduces the pay of these employees to a lower the hourly rate so that, when multiplied by time-and-one-half, weekly compensations remain unchanged. “In the end, the employees do not reap a benefit from the new ruling because the company simply cannot afford to stay compliant in the way, I think, DOL envisioned,” says Tina Hamilton, PHR, president of myHR Partner, who has been following the developments of the proposed overtime changes with a watchful eye.

But wait, there’s more…

In addition to the 40th percentile approach, the DOL is also proposing for the first time ever to automatically raise salary levels for highly compensated employees (HCE). It hasn’t been determined yet, but this system would be based on percentiles of earnings for full-time salaried workers or based on changes in inflation. SHRM reports that this would be done on an annual basis, and would also include the salaries of highly compensated employees too. To give you an idea of how this could impact your bottom line, SHRM outlined the change using annual figures:

Changes to Highly Compensated Employees (HCE). The Department is proposing to set the HCE annual compensation level equal to the 90th percentile of earnings for full-time salaried workers ($122,148 annually), or based on changes in inflation. Currently, in order to come within this exemption an employee must earn at least $100,000.

That’s a difference of over $22,000 a year—for each HCE! “That is a huge gap for small companies to have to compensate for all of a sudden, and a huge price tag for large companies that may have hundreds of HCEs employed with them,” says Hamilton. “It’s going to be a significant game-changer for a lot of employers if the proposed overtime rulings go into effect.”

If you haven’t yet checked it out, visit SHRM’s HR Policy Action Center dedicated to information and advocacy efforts surrounding the upcoming overtime regulations. It is worth bookmarking in your browser as new information becomes available.

Keep in mind, that salary is only one basis for determining if a job is qualified for an exempt status according to the FLSA laws.

Have you considered an FLSA audit for your company?

At myHR Partner, we have been conducting in-depth FLSA audits for years. Conducting one in advance of these proposed changed, will not only assure you are current with the federal FLSA requirements, it will help you plan for the potential impact both financially and for your potential upcoming staffing changes. Our clients rely on the FLSA audit to properly classify employees based on the most current FLSA laws. To find out more about our FLSA audits, contact us today.

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