Will You Be in Compliance on December 1? How to Cope With FLSA Changes

David Worrell
Thu, 27 Oct 2016 12:21:51 +0000

Small businesses around the country are worried. Regulatory changes to the Fair Labor Standards Act (FLSA) take effect December 1, 2016, and everyone wants to know whether they will have to change the compensation of their salaried employees.

For many of us, the answer is “yes”—and it may be a painful transition. Although the only change to the FLSA rules is an increase in minimum pay for exempt employees (i.e., the minimum wage a worker must receive to be considered exempt from overtime pay), it is a significant change! Every business will have to examine payroll policies for salaried workers, particularly those who play any role in manual labor, including crew chiefs and field supervisors.

To determine whether your company is in compliance with FLSA (now and in December), review the following decision rules for any employees who currently are not paid overtime:

1. How much do they earn?

The new FLSA rules increase the minimum wage for any “exempt” employee to $913 per week, or $47,476 annually. This is the simplest rule: Anyone making less than $47,476 must be paid overtime when they work more than 40 hours per week. In other words, lower-paid employees are always non-exempt. Remember that, in this context, “non-exempt” means that an employee cannot work overtime without extra compensation, or they are not exempt from receiving overtime pay.

2. What do they do?

Some of us have concluded that any amount of manual labor means that an employee must be made non-exempt. This is not entirely correct, but the FLSA “Duties Test” does address an employee’s job duties. Fundamentally, if an employee’s duties are primarily labor (versus management), then they fail the duties test and must be treated as non-exempt (i.e., they must be paid overtime, even if their salary is greater than the minimum).

Construction companies, restaurants, and service businesses will have particularly difficult times with this rule. While most field workers will clearly fail one of the two tests above, an entire class of workers—crew chiefs and supervisors—will fall into a gray area that is called the Executive Exemption. To qualify as exempt from overtime, an “executive” must meet all of the following three criteria:

1. Regularly supervises two or more other employees

2. Has management as their primary duty

3. Has input into the job status of others (such as hiring, firing, promotions, etc.)

Note: Highly compensated employees (making greater than $134,004 annually) must meet only ONE of the above three criteria to be considered exempt.

3. Choose Carefully

Let’s look more closely at this last one. A supervisor on a construction site may well meet these three criteria AND perform some manual labor. In fact, if he performs the same labor tasks as the crew, the executive exemption becomes difficult to claim.

“It’s the difference between a team leader and a true manager,” explains independent HR consultant Valerie Edson, SPHR. A “team leader” may be in charge, but contributes to the job in a manner that is equivalent to those that he supervises. A manager may do some of the same work, but contributes “independent judgment and discretion on matters of significance,” according to Edson.

Can you make a case that your crew chief is employed primarily for their good judgment and discretion? Or would you say that their primary role is helping the team with manual tasks? A business owner might have to make a somewhat arbitrary decision about whether or not to classify a crew chief as exempt from OT … but that decision should be well documented and based firmly in fact.

No matter how tempting it is to read the rules in your own favor, keep in mind that in any FLSA audit, the Department of Labor (DOL) will look much deeper than a simple job description to determine eligibility. And if it concludes that you incorrectly exempted an employee from OT, you will have to pay back an amount equal to the prior two years of overtime wages for ALL employees in that class. What’s worse, if the DOL finds that you “willfully” misrepresented the employee’s exempt status, the penalty extends to three years in arrears and the risk of additional fines.

Do This Now

There is plenty of ambiguity about the FLSA, but no matter how you read it, it’s best to document your decision and the rationale you use to classify workers.

Pen a short memo with the salient points that you considered, and build a case for each class of worker. Then keep the memo handy in case of an audit. It may not convince the DOL that you correctly classified an employee, but it may convince them that you did not act in “willful” disregard of the rules—and thus help you avoid additional penalties.

Still confused? This is a complicated topic. If you’re in doubt, seek the guidance of a legal or HR professional who can discuss your specific circumstance and help protect both you and your workers.