FLSA Overtime Proposed Regulations: What You Need to Know Now to Be Prepared Presented by: Melissa Sharp Murdock, Esq., Senior Manager, External Affairs

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Agenda Background Proposed Overtime Rule What Happens Next? Salary Test Duties Test What Happens Next? Comment Period and Timing WorldatWork’s Concerns What Can TR Professionals Do to Prepare? Q&A

Background March 2014: President Obama directed the Department of Labor (DOL) to update the Fair Labor Standards Act (FLSA) overtime protections Goals: Raise middle-class wages Increase the number of nonexempt workers Provide bargaining power to low-wage workers who do not have certain protections Simplify the identification of overtime-eligible employees

Background DOL Proposed Rulemaking Process Listening sessions Met with industry leaders and labor advocates WorldatWork met with DOL in April 2015 WorldatWork’s concerns: Raising the salary level test too high will have unintended consequences. Companies may lower base wages to offset the regulations. May make more employees eligible for overtime pay but this doesn’t mean that these employees will earn overtime pay.

Proposed Overtime Rule

Proposed Overtime Rule A Hard Day's Work Deserves a Fair Day's Pay On June 29, in a Huffington post blog, President Obama announced that his administration would publish proposed rules updating overtime regulations “This week, I'll head to Wisconsin to discuss my plan to extend overtime protections to nearly 5 million workers in 2016, covering all salaried workers making up to about $50,400 next year. That's good for workers who want fair pay, and it's good for business owners who are already paying their employees what they deserve -- since those who are doing right by their employees are undercut by competitors who aren't.”

Proposed Overtime Rule Salary Test Current Law: $455/week or $23,660 per year Proposed Rule: Using 2013 data, $921 per week or $47,892 per year 2016 estimates, $970 per week or $50,440 per year Proposed rule sets the standard salary level test at the 40th percentile of weekly earnings for full-time salaried workers Other measure under consideration is CPI-U Consumer Price Index for All Urban Consumers (excludes rural populations and represents approximately 80% of the population) Department believes that regularly updating the salary level is the best method to ensure the tests continues to provide an effective means of distinguishing who is and overtime- eligible white collar employee DOL states that setting the salary level at the 40th percentile of wages with a mechanism to automatically update is the simplest way for securing effectiveness of the salary test as the bright line test for exempt-vs non-exempt workers. A salary test set lower or without a mechanism to update, would require a more rigorous duties test First poll question

Proposed Overtime Rule Salary Test Proposed Rule establishes a mechanism for automatically updating the salary and compensation levels to ensure that they will continue to provide and effective test for exemption 40th percentile of weekly earnings for full-time salaried workers; or Consumer Price Index for All Urban Consumers (CPI-U).

Proposed Overtime Rule Salary Test (cont.) Bonuses DOL is soliciting comments on whether or not companies should be allowed to include nondiscretionary bonuses, such as production or performance bonuses to satisfy a portion of the standard salary test requirement. DOL notes the prevalence and importance of bonuses. Seeking comment on whether or not bonuses and how much of the bonus can be attributed to the salary threshold test. In the proposed rule they discuss capping bonuses to 10 percent of the salary level if they were to adopt a provision allowing bonuses to be included to meet the salary requirement

Proposed Overtime Rule Salary Test (cont.) Threshold for highly compensated employees (HCE): Current HCE salary test is $100,000 annually DOL is proposing to set the HCE at the annualized value of the 90th percentile of weekly earnings of full- time salaried workers ($122,148 annually)

Proposed Overtime Rule Duties Test DOL has not set forth specific proposals to modify the current standard duties test. DOL is seeking comments on the duties test. Specifically they want to know if the duties tests are currently working to screen out employees who are not bona fide white collar exempt employees? Are there additional occupations that should be excluded from the FLSA salary and duties tests? White collar exemption still exists for certain executive, administrative & professional employees. Currently computer professionals, outside sales professionals, doctors, teachers and lawyers

Proposed Overtime Rule FLSA White Collar Exemptions Exclude certain executive, administrative and professional employees from federal minimum wage and overtime requirements Certain categories of employees are excluded from these requirements such as computer professionals, outside sales employees, doctors, teachers and lawyers Proposed rule does not seek to change these categories but does solicit suggestions for additional occupation examples

Proposed Overtime Rule What determines if an employee qualifies for one of the white collar exemptions? Employee generally must: 1. Be salaried, paid a predetermined and fixed salary that is not subject to variations based on the quality or quantity of work performed; 2. Be paid at least a specific salary threshold which is $455 per week ($23,660 annually) under current rules; and 3. Primarily perform executive, administrative or professional duties.

What Happens Next?

What Happens Next? Comment Period NPRM was officially published in the Federal Register on Monday, July 6. The public had 60 days to submit formal comments on the proposed rule. Comments were due Friday, Sept. 4. DOL received 290,044 official comments on this proposed rule. Groups will send in formal letters asking for an extension to the comment period.

What Happens Next? Timing The DOL will review the comments submitted through the formal comment process. The administration will attempt to finalize the rule and have it take effect in 2016. Republicans in Congress may attempt to prevent the rule from going into effect. Obama still has veto power. Congress will not be able to overturn the rule unless a Republican is elected in 2016. APA – Administrative Procedures Act – In 2004 the last time changes were made to OT regulations, DOL gave businesses 120 days to implement the new regs

WorldatWork’s Concerns

WorldatWork’s Concerns WorldatWork fielded a Snapshot Survey on Proposed FLSA Changes 48% of orgs said that reclassifying an employee from exempt to non-exempt will likely decrease workplace flexibility options 65% of respondents said the proposed salary level increase is “too high” Nearly 80% of respondents stated that reclassification to nonexempt status would have a negative effect on its overall workforce, as exemption classification is a perceived measured of status desired by employees.

WorldatWork’s Concerns

WorldatWork’s Concerns Potential Consequences Positive Reduce chance of employers exploiting workers under ‘guise’ of exemption status Improve wages for former exempt employees now eligible for overtime Improve wages for exempt employees whose employers raise pay to meet new salary level Negative How will employers manage higher labor costs? Reduce base pay to offset overtime eligibility Eliminate jobs to offset additional overtime expense Employers may reduce or eliminate supervisory positions and associated advancement opportunities Potential for less workplace flexibility

What Should Total Rewards Professionals Do to Prepare?

What Should Total Rewards Professionals Do to Prepare? Recommendations Review employees currently classified as exempt who will fail the new salary test Review job documentation and tasks of impacted jobs Ensure that your senior leadership is notified that potentially significant changes have been proposed Review bright line employees who fall below $122,148

What Should Total Rewards Professionals Do to Prepare? Perform Analysis Gather a list of employees who are currently classified as exempt and earn a base pay level below $970/week or $50,440/year. Include any expected incentive or bonus payments in a separate column. If anecdotal data exists on the number of hours these employees may be working on a weekly basis in excess of 40/week, include in another column. Highlight these jobs/employees on organization charts to get a visual idea of which jobs could be affected and where they exist within your organization.

Perform Analysis (cont.)) What Should Total Rewards Professionals Do to Prepare? Perform Analysis (cont.)) Discuss options with leadership and cost model alternatives to address: Raise pay to meet the new salary level and maintain exemption. Re-classify affected employees to nonexempt, maintain pay level and pay overtime. Use estimate of hours worked over 40 to calculate additional cost. Re-classify to nonexempt, adjust pay down to accommodate additional overtime now due.

What Should Total Rewards Professionals Do to Prepare? Perform Analysis (cont.) Discuss options with leadership and cost model alternatives to address: Re-classify to nonexempt, maintain pay level but prohibit overtime. Use estimate of hours worked over 40 to calculate additional work (hires FT or PT) that need to be hired to absorb work. Job elimination to absorb additional costs.

What Should Total Rewards Professionals Do to Prepare? Other Implications to Consider Who will you assign exempt duties of work of (current) nonexempt employees? Move duties to next level up (manager)? Maintain duties with the nonexempt employee? If pay levels are increased to maintain exemption status, what pay compression effect will that have with the next level up? What career development or succession planning implications will these changes create? What Should Total Rewards Professionals Do to Prepare?

Questions Answers

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