FLSA Rule Change and Its Impact on
Government Employers
By Ronnie Charles
O
n June 30, 2015, the US Department of Labor issued a
proposed change in the salary test related to exemption
from the overtime requirements of the Fair Labor Standards Act
(FLSA). The rule change substantially increases the rate of pay
that an employee would need to receive in order to be considered
exempt from overtime (payment for any hours worked in excess of
40 within a defined 168 hour period). While the proposed rule will
be subject to review and comment for several months and the final
rule may differ from the proposal, public sector employers need
to understand the implications of the new rule so that they can be
prepared when change is implemented.
This article addresses the substance of the proposed rule and its
potential implications, as well as approaches that an employer
may want to consider to mitigate its impact. According to the
information provided by the White House, the new rules will
extend overtime pay to nearly 5 million workers who are not now
eligible for overtime payment.
Since the mid-1980’s, public sector employers have been subject to
the Fair Labor Standards Act and the requirement to pay overtime
at the rate of 1.5 times an employee’s regular rate of pay for any
work performed in excess of 40 hours within a defined 168 hour
work week (7 day period.) The FLSA has four categories for
exemption including Executive, Administrative, Professional and
Outside Sales. Within each category, there are specific tests that
must be applied for a position to be considered exempt. One of
those tests relates to salary where an employee earning less than
$455 per week ($23,660 per year) would not qualify for exemption,
even if they met the other requirements for exemption (except
for public safety first responders that already have a $100,000
minimum test for exemption.) The proposed rule does not change
the exemption tests beyond the minimum rate of pay. As proposed,
the new rate of pay test would be $970 per week ($50,440 per
year.) The overtime salary cap would also be subject to indexing
in future years based on inflation or wage growth in contrast to a
static number as is currently the case. As reported by the White
House, when the current salary threshold was adopted, 62 percent
of professional, administrative and executive employees were eligible
for overtime. Today, that number has dropped to about 8 percent.
This article does not address issues related to whether an increase
in the salary threshold is appropriate but, rather, will focus on
understanding the ramifications of the change.
While the proposed change will not impact any employee currently
subject to the overtime requirements of the FLSA, the intent is
to broaden that population to include lower level managers and
professionals. This is the most obvious issue of concern impacting
public sector employers. From what we have been able to learn at
this point, there are four ways that the new rule will affect public
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agencies and employees. There are other impacts to the employers
relative to tracking and calculating the amount of overtime for this
population but that set of issues will be discussed separately.
Here are four ways that public sector employers could be impacted:
1. Lower level managers such as operational managers in public
works or office managers would now be considered non-exempt
and subject to the overtime requirements.
2. Depending on an agency’s current compensation plan and the
labor market(s) in which the employer competes, entry-level
professionals, who have historically met the exemption test as
a professional but are earning less than the proposed minimum
of $50,440 per year, would need to have their compensation
increased to the new threshold or such professionals would
become subject to the overtime requirements.
3. We know that managing overtime is always a challenge.
One option, though, is to impose limitations on employees
working overtime, so that they do not exceed 40 hours within
the established workweek (or 8 hours in a single day if the
requirements in certain states continue in effect within those
states.)
4. While it is clear that the intent of the rule change is to increase
wages for a large number of workers, changes in the management
of staffing and possible reduction in hourly rates could offset
any potential overtime that may be incurred resulting in no
substantive change in overall compensation.
In addition to the four ways that the rule change may affect
employees directly relative to base pay, public agencies will need to
consider the following:
1. How will time be tracked for the positions that would now
become eligible for OT that were previously exempt? Currently,
many organizations do not track time for professional and
managerial employees other than by the day. The proposed rule
change could significantly impact current HRIS and payroll
systems which may require modifications.
2. How will employers control or deal with the amount of overtime
accrued by currently exempt employees who will now become
OT eligible under the new rule? This may impact various types
of positions including use of exempt positions for emergency
call-out or other situations.
3. Is the job classification plan designed in such a way that the
jobs subject to overtime are clearly delineated from those that
are not eligible for overtime? If entry level professional positions
CONTINUED ON PAGE 36
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PMA-HR is pleased to announce the candidate for the 2017
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FLSA
CONTINUED FROM PAGE 27
are currently exempt but they become subject to OT under the
new rules, how will employees in the class that make more than
the threshold amount be handled? Having both exempt and
non-exempt individuals in the same class of work will certainly
create an interesting issue, if side by side employees conducting
the same work are treated differently given their relative pay.
4. Are there current policies in place relative to administrative
leave or extra vacation days for exempt employees to offset the
additional hours that employees are expected to work? If so, how
will the amount of additional leave that has been granted to the
individual employees now receiving OT be addressed? There will
likely be a need to revamp those policies to make it clear that
once an employee loses their exemption status, the additional
leave will also be lost.
5. Are other benefits offered to employees who are exempt
from OT? Those benefits will need to be identified and a
determination made as to how they are managed. For exempt
employees that are covered by collective bargaining agreements
or MOU’s, these issues could be subject to the meet and confer
or collective bargaining process as they relate to wages, hours and
other terms and conditions of employment.
While this discussion is not intended to be an all-inclusive summary
of impacts, we believe that the issues identified are among the
most significant. All public sector employers should be aware of
the potential impacts and begin planning now relative to how this
change will be accommodated once it goes into effect in 2016.
Please note that we say when and not “if” as we believe that the
rule will be adopted although it may undergo minor change due to
pressure that will brought by many different employer associations
and organizations.
Ronnie Charles is a principal consultant with Arthur J. Gallagher &
Company’s Human Resources and Compensation Consulting Practice.
He can be reached at [email protected]. —N
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