Updated October 26, 2016
Information regarding the much-anticipated changes to the Fair Labor Standards Act (FLSA) was published in the Federal Register on May 23, 2016. In 2014, President Obama directed the Department of Labor (DOL) to update the regulations regarding the exemption of executive, administrative and professional (“EAP”) employees in an effort to “simplify the regulations while ensuring that the FLSA’s intended overtime protections are fully implemented”.
Though not quite to the level initially suggested by administration, there is a significant increase in the minimum pay required for exempt status per FLSA effective December 1, 2016. Last updated in 2004, the current minimum annual salary for exemption of EAP employees is $23,660 annually or $455 per week. This will increase to $47,476 annually or $913 per week. To remain exempt, computer employees must also receive a weekly minimum of $913 or, remaining unchanged, an hourly rate of $27.63. Highly Compensated Employees (HCE) minimum annual compensation rises to $134,004 and requires that these employees receive at least $913 per week.
The new regulations include provisions in which the minimum pay requirements will automatically be updated every three years, with the first update scheduled for January 1, 2020. Consistent with the determination of the new salaries to be effective December 1, 2016, the updates for EAP employees will be equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region. HCE employees will remain at the 90th percentile of earnings of national full-time salaried workers.
A new addition is the inclusion of nondiscretionary bonuses and incentive payments in the calculation of total annual compensation for EAP employees. Employers may now include these figures to fulfill up to 10% of the annual salary requirement if paid at least quarterly.
Although discussed, “duties” tests remain unchanged, and employees must still meet these requirements in order to be exempt from FLSA’s overtime requirements.
The DOL estimates that in FY 2017, 4.2 million U.S. workers who are currently exempt will no longer meet the compensation exemption criteria. Employers must now determine who is impacted by this change and what the best method is for remaining compliant with FLSA standards. Employers may choose to increase pay or change their status to non-exempt. With each option comes multiple considerations and challenges. Policies and procedures, salary ranges, employee morale, scheduling and monitoring of work hours, among others, will be impacted.
Although the December 1, 2016 change impacts all employers, government contractors should have already assessed the impact on costs and cost estimates. Unless a contractor had already factored in the proposed change, a contractor should have determined if and how the change will impact forecasted labor rates (for salaried direct employees) and forecasted indirect rates (overhead or G&A for salaried indirect employees). If this has not been accomplished, one relatively straight-forward “first test” is to determine if any existing salaries are more than the old threshold ($455/week) and less than or equal to the new threshold ($913/week). If “yes”, determine (or estimate) if those employees typically work more than 40 hours per week (and how many hours for previously uncompensated overtime) in order to develop forecasted labor rates and indirect rates based upon the increase in compensation beginning December 1, 2016. All else being equal, contractors with employees who fall within the impacted salary range (between $455 and $913/week) will experience cost growth unless none of those employees worked (or are anticipated to work) over 40 hours per week.
Now that the amount is known, a contractor must factor it into cost estimates/bid proposals. For contractors concerned about the unfavorable competitive impact of additional compensation costs, theoretically every other contractor (with similar salaries) will be forced to make the same adjustment. As pointed out in the DOL media release, an employer (contractor) can avoid paying overtime by hiring more employees to avoid having employees work more than 40 hours per week, or by paying all salaried employees at least $913/week. The latter is a very expensive alternative, as it would equate to doubling a current salary, and it only makes business sense if the salaried exempt employee (paid at $455/week) has been and will continue working approximately 67 hours per week.
One last unanswered question for impacted government contractors with existing fixed price contracts or T&M contracts with fixed fully burdened labor rates: “Does the DOL change present the basis for a request for equitable adjustment?” Regardless of the answer, this is something to consider if any particular contractor is significantly impacted on existing contracts.
Sheri joined Redstone Government Consulting, Inc. in December 2012 as a Human Resources Consultant. She provides HR consulting services to our customers on a wide range of issues, from specific projects to an ongoing outsourced solution of the human resources function. Sheri has two decades of experience in providing a comprehensive assessment of all areas of HR, including establishing and implementing policies and practices, contract transition efforts/onboarding, and investigations. Sheri’s experience covers a broad spectrum of compensation planning and analysis for total compensation projects, reasonableness assessments including executive compensation, compensation philosophy development, total reward strategies, benefits analysis, market pay and pay equity evaluations. She regularly supports clients with the analysis and mapping of labor categories and the preparation and analysis of wage calculations and supports clients in pricing disputes with DCAA. Sheri has a wealth of experience in navigating the many compliance challenges associated with Service Contract Act and Davis Bacon Act. She has been a valuable resource to our clients in all these areas. She stays abreast of the various requirements of the Department of Labor and, of great importance to government contractors, the Office of Federal Contract Compliance Programs, as well as other federal and state regulations impacting human resources. Professional Experience Prior to joining Redstone Government Consulting, Inc., Sheri served in various roles in the Human Resources arena. While employed by a mid-size government contractor she assisted with database development, recruiting, affirmative action planning and contract proposals. Sheri later became an Employment Specialist with one of the largest employers in Huntsville, where she assisted and led managers in the interpretation and documentation of the progressive disciplinary process, conducted employee investigations and allegations of discrimination, sexual harassment, wrongful discharge and employee disputes, conducted unemployment hearings and conducted new employee orientation. Sheri developed and presented management training, administered facility compensation plan, monitored staffing budgets and wrote job descriptions and handbook revisions.