CPAs and Advisors with Your Growth in Mind

Government Contractors

FLSA Changes on Overtime Compensation Expected Summer 2016

By: Sara Crabtree, Manager

Cherry Bekaert has been providing periodic updates on proposed changes to the Fair Labor Standards Act (“FLSA”) in regard to overtime compensation and how employers might be impacted by these changes. The Solicitor of Labor has now confirmed that the changes are expected to be finalized and announced during the late spring or summer of 2016, and will become effective 60 days after finalized.

In March 2014, President Obama issued a memorandum to the Secretary of Labor, directing him to “propose revisions to modernize and streamline the existing overtime regulations” (under the FLSA). Although the President did not direct the Secretary how to revise the regulations, his memorandum and the related fact sheet indicate the intent of revising the regulations is to bring more workers out of exempt status and give them the benefit of overtime compensation.

Under the current regulations, a white collar employee may be exempt from overtime rules if they are paid at least $455 per week (equivalent to $23,660 annually for a full-time employee) and have primary duties that are consistent with managerial, administrative, or professional positions as defined in the regulation’s standard duties test; certain computer professionals and teachers are excluded from these requirements.

In June 2015, the Department of Labor (“DOL”) proposed setting the new minimum salary level threshold at the 40th percentile of weekly earnings for full-time salaried workers based on national data from the Bureau of Labor Statistics. This year, the DOL estimated the threshold to be $970 a week or $50,440 for a full-time employee, and proposed rules will index the threshold annually.

There are many entry-level management and support staff positions that are typically classified as exempt from overtime pay that may be impacted. Furthermore, it is not uncommon for exempt positions to be eligible for additional benefits (e.g., paid time off) and/or be subject to different work rules (e.g., timekeeping, flexible work schedules) than non-exempt positions.

The DOL received almost 300,000 comments on the proposed changes and closed the comment period in September 2015. Not much had been released on the DOL’s review until mid-February 2016, when the Solicitor of Labor spoke at a Federal Labor Standards Legislation Committee. It was again stated that the proposed amendments recommend an increase to the salary basis test to “approximately $50,000” per year, and provides for a mechanism for subsequent annual increases to the salary test. A possible change to the duties test was inferred as well, even though no specific changes were proposed.

The Solicitor also confirmed the DOL’s intention to make the changes effective before the end of 2016. There are numerous implications to employers across all industries as the final decisions are revealed. Significant increases in salaries to maintain exempt status, reclassification of employees between exempt and nonexempt status, modifying job duties and position descriptions, changing schedules to eliminate overtime requirements, and restructuring bonus and incentive pay are just a few of the many headaches which employers could soon be facing.

There are additional considerations for government contractors. Contractors with Time and Material and Labor Hour type contracts, which are not subject to the Service Contract Act, will have to determine the effect on their contractual rates—employees who were exempt but become nonexempt will have to be paid an overtime premium for hours in excess of 40 per week. Even cost reimbursable and fixed price contracts could be subject to needing changes. Contractors will more than likely have to submit a Request for Equitable Adjustment under one of the ‘change’ clauses under Federal Acquisition Regulation (“FAR”) 52.243-1 through 5. Timekeeping adjustments for historically exempt employees should also be evaluated.

Cherry Bekaert recommends that employers begin to evaluate the potential impact of these proposed rules on all employees, if you are not already doing so. This should include a review of salaries, work schedules, benefits provisions, and primary duties. The contents of the final rules are not known, but early planning and consideration of the pending changes will be critical. How you handle these changes and what the impact will be to your organization will vary per employer. What is known is that all employers need to be aware that substantial changes to federal wage and hour laws appear to be coming.

Topics: , , ,