Long-Awaited FSLA Changes Can Have Dramatic Impact on Small Companies

It made a big splash in the news and there have been a number of articles about it, so almost everyone knows that the rules regarding salaried employees will be changing as of December 1, 2016. It will effect more than 75,000 workers in Washington State alone.

Here's a brief summary of the changes:

  1. As of December 1, employees who earn less than $47,476 annually ($22.85 per hour) will be legally entitled to earn overtime (time and a half) when they work more than 40 hours in a week, even if they are classified 'salaried exempt'. The reason for this change is that the salary part of the two-fold exemption test is changing. Through November 30, salaried exempt employees must earn more than $23,600 ($11.35/ hour) annually. The duties portion of the test isn’t changing, only the salary level.
  2. Up to 10% of the salary level used to make the calculation can come from non-discretionary bonuses, incentive payment, and commissions. (Previously, there’s been no provision to count those.)
  3. The salary and compensation levels will be updated every three years, to meet the 40th percentile of full-time salaried workers in the lowest-wage Census region (currently the South).

Exempt or non-exempt is NOT determined by the employer, but the government, and they think that all employee should be paid hourly (thereby earning overtime). So they restrict who can be exempt from overtime to those people who:

  • perform 'high level' work
  • are a learned professional, like a lawyer, doctor, teacher, engineers, clergy, etc. or whose work is “predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment.”
  • are a “creative professional,” like an actor, musician, composer, writer, cartoonist, or in some cases a journalist.
  • manage a business or a part of the business and manage at least two people.
  • do work directly related to management or general business operations that involves the exercise of independent judgment and discretion about matters of significance. This refers to relatively high-level employees whose primary job is to keep
  • the business running (such as HR, finance, marketing, PR, and legal) and who have the authority to make independent decisions on significant matters.
  • are a skilled worker in the computer field.
  • are in sales and you regularly work away from the employer’s place of business.

As a quick recap on the salaried/exempt classification:

  • In the U.S., all workers are classified as exempt or non-exempt.
  • Non-exempt workers must be paid overtime (time and a half) for any hours over 40 they work in a single week.
  • Exempt workers are exempt from overtime requirements — but they must be paid the same salary every week, if they worked any portion of it. And there are very few exceptions.

You can read more about these exemptions here at the governments' website, FSLA.

Retail and food service are going to be the most impacted by this change. For example, a (salaried exempt) retail manager who was making $30,000 a year will lose her exemption and her employer will now pay her overtime.

Employers have a variety of ways to respond to the change. One business might decide that raising salaries above the threshold is better than tracking hours and paying overtime. Another might choose to limit workers to 40 hours and hire temporary staff or freelancers to make up the difference. Still others may prefer to pay the overtime, but cut base salaries or other benefits to compensate. Or any of them might simply reclassify workers, whether or not the reclassification is warranted. Put simply, each business owner will have to take into account the trade-off of higher payroll and administrative costs versus a potentially dispirited staff that sees better opportunities elsewhere.

Employers will want to be very thoughtful about how the respond to the coming changes: Losing your best employees because you won't pay them what they are worth (according to the government) will be very expensive in terms of training and performance. Moreover, employers need to be very cautious about running afoul of government oversight.

It's worth noting that I've heard at least one business owner tell me that he doesn't believe this rule will go into effect and is therefore making no plans to respond. Considering that this rule was requested more than six years ago, was open for public comments for almost two years and deliberated for an additional year, coupled with a lack of interest in DC to delay the implementation... The an incoming administration would have to go through the same process to overturn the rule as well as make it a priority for its first 100 days. Neither presidential candidate has indicated their interest in doing so. That business owner is relying on wishful thinking and the power of disbelief to avoid dealing with the issue.

©2016, Lisa Mc Sherry, DawnspringHR. All rights reserved.

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