Understanding the New Department of Labor

Overtime Law

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OVERVIEW

The Department of Labor (DOL) announced a new rule updating the regulations governing which “white-collar” workers are entitled to the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay protections.

The rule will change the salary level threshold that is required to classify an employee as “exempt” from the FLSA’s minimum wage and overtime pay requirements.

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$23,600

When this goes into effect, the DOL estimates that more than 4 million workers who are “exempt” under the current regulations will become entitled to overtime pay in the first year.

For many employers, this means there is work to be done, including:

• Reclassifying employees• Calculating and tracking hours• Adjusting wages• Updating time and labor tracking systems• Communication plans to the workforce and more!

New threshold

Current threshold

$47,476

The new rule will qualify workers for overtime exemption, increasing the threshold more than 100% from $455/week ($23,600/year) to $913/week ($47,476/year).

$23,600

POTENTIAL IMPACT

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WHEN THE RULE BECOMES EFFECTIVE, WILL YOUR COMPANY BE PREPARED?

This guide will help employers like you understand:

• FLSA, the new DOL overtime regulation, and what it means to you

• How to identify employees who will be impacted by the legislation

• Options for becoming compliant

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UNDERSTANDING FLSA

The Fair Labor Standards Act (FLSA) is a federal law that establishes certain labor standards, including minimum wage and overtime pay for certain employees.

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UNDERSTANDING FLSA

When employees are covered by this law, they are nonexempt. This means their employers are required to pay them a minimum wage, as well as an overtime wage equal to one-and-a-half times the employee rate or pay for any hours worked more than 40 hours per week.

When workers are not covered by this law, they are considered exempt. Under current regulations, these “white-collar” employee positions (executive, administrative, and professional employees) are not entitled to (or, they are exempt from) overtime wages when their weekly wages are above the established salary threshold of $455 per week ($23,660 per year).

48 hours =40 hrs @ hourly rate8 hrs @ 1½ times hourly rate

48 hours =Established salary, regardless of hours worked

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FINAL LEGISLATION

The final rule (official name: “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees”) focuses primarily on updating the salary and compensation levels needed for executive, administrative, and professional workers to be exempt. Specifically, it:

1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);

2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and

3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

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WHY WAS THIS RULE PROPOSED?

The FLSA was enacted in 1938, establishing:• A national minimum wage• A 40-hour work week• Child labor laws• And, overtime regulation

While the act currently guarantees time-and-a-half pay for hours worked more than 40 per week in certain jobs, the current threshold to qualify for overtime pay ($23,660) is considered by some to be outdated, as it sits below the poverty line.

Overtime threshold

$23,

660

$24,300Poverty line

*For a family of four

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WHEN CAN I EXPECT CHANGES TO TAKE PLACE?

On May 18, 2016, President Barack Obama and Secretary of Labor Thomas Perez announced the publication of the DOL’s final rule. The effective date of the final rule is December 1, 2016.

Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

This means that the final rule will be effective this year.

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WHAT DOES THIS MEAN FOR EMPLOYERS?

BE PREPARED!

Employers should start becoming familiar with the changes and how they impact your business and staff. Planning ahead will ensure you and your business are ready for the transition and changes when the final rule goes into effect in December.

The new law is bringing about several changes, but human capital management software solutions, like Paylocity’s, can help.

By identifying employees who will be impacted by the law and understanding your options for becoming compliant, you can then use Paylocity tools to help simplify the updates to your workforce and payroll management.

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1 Identify exempt employees who make less than $47,476 per year.

HOW TO APPROACH THE NEW LEGISLATION

It is important to understand that this new rule will affect salaried exempt employees making less than $47,476. Identifying the number of impacted employees and what types of roles will be impacted will help you understand your next steps.

This can be easily done in Paylocity’s Web Pay, using the Report Writer tool. Please refer to page 21 in this document for steps on how to pull this report.

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2 Determine the hours these employees work during an average work week.

After you have created a list of exempt employees who earn less than $47,476 per year, the next step is determining their weekly hours worked. If they work more than 40 hours every week or even just some weeks, they will be eligible for overtime pay.

Many exempt, salaried employees do not track their hours, nor do their employers. If you do not currently track the hours of the identified employees on your list, you should begin doing so today. Having a record of these hours will aid in ensuring you are complying with the regulation and paying employees what they are entitled.

Paylocity’s comprehensive solution, Web Time, ensures accuracy and accountability in time and labor management.

HOW TO APPROACH THE NEW LEGISLATION

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3 Calculate their current hourly rates.

Exempt, salaried employees do not actually currently make an hourly rate. However, understanding current hourly and yearly labor costs will aid you in managing future labor costs under the new legislation. Knowing your employees’ current hourly rate is the first step toward calculating their future compensation.

This first step is simple: current salary divided by 52 weeks, then divided by their weekly hours worked. For example:

Chris: ($40,000 salary / 52 weeks) / 50 hours a week = $15.38 an hour

Mallory: ($35,000 salary / 52 weeks) / 48 hours a week = $14.02 an hour

Roderick: ($29,000 salary / 52 weeks) / 45 hours a week = $12.39 an hour

HOW TO APPROACH THE NEW LEGISLATION

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After having a thorough list of your exempt, salaried employees who make less than $47,476 and knowing what their current hourly rate is, you’ll need to now calculate what their new annual pay would be. Remember that the overtime rate (OT rate) is one-and-a-half times the hourly rate. Using the same example as before:

[(Hourly rate x 40 hours) + (OT rate x # of OT hours per week)] x 52 weeks = New annual pay

For these three employees alone, this amounts to more than $11,000 in new wages paid out annually.

4 Calculate their new annual pay under the new law.

Chris: ($15.38/hr x 40 hrs) + ($23.07/hr x 10 hrs) x 52 weeks = $43,986.80 yearly

Mallory: ($14.02/hr x 40 hrs) + ($21.03/hr x 8 hrs) x 52 weeks = $37,910.08 yearly

Roderick: ($12.39/hr x 40 hrs) + ($18.59/hr x 5 hrs) x 52 weeks = $30,604.60 yearly

HOW TO APPROACH THE NEW LEGISLATION

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UNDERSTANDING YOUR OPTIONS

Once you have identified what your employees are currently making versus what they would make under the new law, you must evaluate your next course of action to become compliant. There are essentially a handful of options before you (some listed below), each of them effecting labor and/or costs. What works for your company may not work for others, so it is important to weigh factors such as employment needs, headcount, and wages allocated.

Reclassify employees from salaried to hourly with

adjusted wages

Increase salary to $47,476;no need to record hours

or pay OT

Reclassify employees from salaried to hourly;

do not allow employees to work OT

Reclassify employees from salaried to hourly without adjusted wages or hours

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Reclassify employees from salaried to hourly, without adjusted wages or hours

With this option, all employers need to do is change the employee’s status (exempt to nonexempt) and use their current hourly rate. The employee will continue to work the same hours, with some of those hours qualifying for overtime pay. While this is an easier method, the employer will incur additional wage costs since the employee will now be making overtime rates after they reach 40 hours per week.

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Reclassify employees from salaried to hourly with adjusted wage

With this option, the hourly rate will be adjusted with the overtime hours in mind. The annual pay will not change, but the employee’s current hourly rate will decrease in order to allow for overtime pay.

With Chris’ example:

Chris makes $40,000 a year, or $769.23 a week, while working 50 hours a week.

To keep his salary close to $40,000/year, the company must adjust his hourly rate (since he will become an hourly, nonexempt employee) in order to maintain his salary and have him continue to work 50 hours per week.

Chris’ rate would adjust to $13.99/hr (from $15.38/hr). He will still work 50 hours a week and he will still bring home $40,000 annually. He will, however, be eligible for overtime pay and any hours more than 50 hours per week will earn him over his expected yearly income.

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Increase salary to $47,476; no need to record hours or pay OT

With this option, employers will simply increase the employee’s salary to at least $47,476 so they can remain an exempt, salaried employee. There will be no need to track hours, as the employee will not be eligible for overtime pay.

Reclassify employees from salaried to hourly; do not allow employees to work OT

With this option, employees will become nonexempt hourly workers, meaning they will be eligible for overtime pay. However, employers will tell employees that they should never work any hours more than 40 hours a week. Wages may stay the same or decrease, depending on if the hourly rate is adjusted. Either way, labor is lost since employees will no longer work overtime.

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CONCLUSION

There are clearly administrative, cost, and labor implications with each option. Work hours and productivity may be lost in the effort to stabilize wages. Or, productivity will remain the same, but wage costs could increase. Or, neither could change, but the level of work needed to ensure compliance may be challenging. What is important to understand is that none of these options are right or wrong. You simply have to understand your organization’s priorities and how they fit under the new law.

Other steps you can take to be prepared:

• Assign an employee or a team to dive in to the financial and labor implications of the new legislation.

• Prepare a communications plan to employees. This includes announcing the changes company-wide as well as knowing how to talk through wage and/or hour adjustments with impacted employees.

• Check back with the Department of Labor from time to time to educate yourself on proposed laws.

• Reach out to Paylocity with any questions on how our solutions can assist you with preparation.

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1. After logging into Web Pay, select Reports & Analytics > Reporting Dashboard.2. Select “Reports Library” from the top navigation.

HOW TO ACCESS EXEMPT EMPLOYEE LISTS IN PAYLOCITY WEB PAY

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3. In the “Name” field, type in “Employee Listing.”4. Click the blue “Search” button. Once the list shows up, click on the “Employee

Listing” link under Name.

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5. Setup your report and corresponding fields.• Output Type: Select either “Excel” option (based on what version you have on

your computer)• Employee Status: Select all except “Terminated”• Pay Type: Select “Salary”• If you would like to filter to certain groups in your organization, you may select

additional filters such as Supervisor, Division, Branch, Department, and more6. Click “Save & Run Report.”

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7. A green bar will appear on the top of the screen that says your report has queued successfully. Once you see this, choose “User Requested” from the “Reports & Analytics” drop down on the top navigation.

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8. Select the report you just ran from the list. It should appear at the top. (Give the report a minute or two to generate. If the report is not yet ready, the title will appear in grey. When it is ready, it will appear as a blue hyperlink.)

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9. Your report will automatically download, showing all the fields you selected when setting up the report.

• The hourly rate of the employee will be listed under “Rate/Salary” and their pay frequency will be listed under “Pay Freq.”

• It is important to note that this is showing their weekly or biweekly payout, when calculating their hourly rate (are you dividing this rate by one week’s worth of hours, or two weeks’ worth of hours?).

SAMPLE

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ABOUT PAYLOCITY

Paylocity is a provider of cloud-based payroll and human capital management, or HCM, software solutions for medium-sized organizations. Paylocity’s comprehensive and easy-to-use solutions enable its clients to manage their workforces more effectively. Paylocity’s solutions help drive strategic human capital decision-making and improve employee engagement by enhancing the human resource, payroll and finance capabilities of its clients. For more information, visit www.paylocity.com.

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.