Column: Prepare now for the new white-collar overtime requirements

Big changes are coming to government contractor payrolls. Effective Dec. 1, 2016, the minimum exempt annual salary for overtime pay increases to $47,476. This effectively doubles the salary threshold that has been in place since 2004.

A recent change to the federal Fair Labor Standards Act (FLSA) exemption rule means the Department of Labor (DOL) seeks greater protection for certain lower-paid executive, administrative and professional (“white collar”) employees that don’t currently qualify to receive overtime pay…even though they may work more than 40 hours/week. The DOL maintains that employees who work overtime must be paid for their extra hours. If not, the employer must prove they are exempt from receiving this overtime pay.

Now is the time to prepare…don’t wait. Let these tips guide your planning, or get outside help.

First – Deep Dive into Your Files

Review job descriptions and pay by role to determine if your employees will be properly classified as exempt under the new rule, using the 3-pronged exemption criteria. To be exempt, the job must satisfy all three criteria:

1. Salary Basis Test – Employee is paid on a salary basis (pay is not subject to reduction based on quality or quantity of work);
2. Salary Level Test – Meets the new minimum salary level ($47,476); and
3. Standard Duties Test – Primary job duties involve the type of work associated with an exempt executive, administrative, or professional employee.

For those employees/positions that don’t meet the minimum salary level of $47,476, determine how much overtime these people are actually working. Highlight positions where the employees consistently work more than 40 hours/week.

In many small government contracting companies, employees wear several hats, so there’s more risk and gray area when it comes to establishing the standard duties for a role. These companies need to get an accurate understanding of how these employees most often spend their time.

The regulations do not require you to document or rewrite job descriptions, but it is a best practice to update them in writing.

Second – Develop a Plan

If any of your employees will become eligible for overtime pay after Dec. 1, you’ll need a plan so you can budget and communicate accordingly. The DOL recommends these three primary options to address the changes:

1. Increase salaries of employees to meet the new minimum

This makes financial sense for employees whose salaries are already close to the new salary level, as long as the “Duties Test” is satisfied. This also makes sense if overtime pay plus base salary for a position would add up to more than $47,476 annually. Increasing salaries to the new minimum maintains these employees’ exempt status, making them ineligible for overtime pay.

2. Pay overtime after 40 hours

You could reclassify affected employees as non-exempt, paying them a salary and then paying overtime for hours worked beyond 40 in a week. See the DOL’s Guidance for Private Employers on Changes to the White Collar Exemptions in the Overtime Final Rule for a thorough understanding of your options.

This choice requires an accurate Employee Time Tracking system. Don’t have a time tracking system? Get one.

3. Reorganize workloads or adjust schedules

Assign tasks that are essential and predictable at the beginning of the work week to better manage overtime hours. Leave the “extras” for Friday afternoon (or the following week).

Third - Communicate Changes

Plan ahead to notify affected employees of any changes to their exemption status, wages, or time tracking expectations. All communication should thoroughly explain why the changes are being made and any new requirements for reporting working hours.

Certain states require that an employee be notified in writing of these kinds of changes. Even where written notice is not required by law, best practices are to provide a written notice, and then decide whether to also have one-on-one talks or a group meeting to follow up and reinforce.

Getting Your House in Order

Reviewing your employees’ actual duties, work week hours, and pay is a good catalyst to formalize or update job descriptions. Cleaning things up for the DOL and FLSA changes may help you clean up other areas of risk, too, which will ultimately protect your margins and your business.

Sally Munn is a Business Profitability Advisor for Insperity. Insperity partners with 200+ small government contractors in the Washington, DC Metro area alone, giving them turn-key labor law compliance locally and nationally, creating operational efficiencies and cost containment strategies, and other types of solutions for all matters HR. Contact her at sally.munn@insperity.com.

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Column: Prepare now for the new white-collar overtime requirements

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