FLSA Overtime Rule Changes: Follow the Rules or Reverse Course and Redefine your Business Strategy?

Co-authored by Jim Finkelstein and Stephen Epling, FutureSense LLC

When we read about the proposed U.S. Department of Labor legislation regarding FLSA ("Fair Labor Standards Act") overtime rule changes, we were reminded of a recent trip to Louisiana and the rental car return - specifically the sign that cautions reversing over the rental car return spikes:

• Could an organization follow the FLSA rules, make any legally required changes and continue moving forward? Or,
• Could an organization reverse over the rental car return spikes and take a chance to redefine the relationship between its business strategy and talent strategy?

The proposed legislative changes related to FLSA may not be as physical as exploding car tires, but we would bet there would be an executive's head somewhere coming pretty darn close if organizations aren't prepared for the changes. It is such an opportune moment to help the organization button-up its business strategy in connection with its (hopefully) existing talent strategy and forge a path forward.

Let us provide some context:

What's Going On?

The U.S. Department of Labor's proposed rule was published in the Federal Register on July 6, 2015. The rule requires an increase to the exempt salary threshold level by an estimated 200% by 2016 to $970 per week, or $50,440 per year with ongoing annual updates to the salary level going forward.

The rule increases the total annual compensation requirement needed to exempt highly compensated employees 22% from today's $100,000 to $122,148 annually. If finalized, companies will be forced to move exempt employees to nonexempt status, and the change in this status may limit employees' hours and wages.

Without immediately asking your HR team to pull a summary of all employees' salaries, think of your current exempt population who work more than 40 hours per week, and some immediate reactions and alternatives come to mind:

1. Change the exemption status for those employees failing the salary threshold test and be prepared for overtime increases.
2. Similar to alternative 1, change the exemption status but forbid overtime and hire additional employees to handle the overflow work.
3. Raise salaries of current exempt population to the proposed threshold level ($50,440)

All alternatives above likely involve some magnitude of a cost increase and possible demoralization of employees - but what if there were a more strategic approach that could respond to the legislation?

How Can Organizations Prepare?

Even though organizations are not encouraged to implement any changes as a direct result of the proposed regulations until the final regulations are released, consider how pay changes or other changes in job assignments may impact your business:

Step 1 - Diagnostics:

First, determine who will be affected. Unfortunately it's not simply those making below the proposed salary threshold of $50,440 per year. Imagine the possibility you have two or more individuals in the same job with one being exempt and the other nonexempt simply due to their pay level. You need to determine with exacting detail the "who" and "why" in the equation.

Step 2 - Plan of attack:

Next, determine how will you address the regulation. You could absolutely follow the rules and use any of the alternatives described above, however why not take the opportunity to reverse your business course and redefine your business strategy? Could your organization redefine its existing talent profile; does your organization have the right amount and the right caliber of talent for future-state success; what degree of internal equity will factor in for any decisions ultimately made? Adjusting "how" you do work may be an interesting and unintended consequence of this legislation.

Step 3 - Implementation:

Then, discuss how the changes will be made and how they will be communicated. The proposed legislation suggests changes will need to be implemented by the end of calendar year 2016. Communication and education will be a huge component, allowing for transparency, "buy-in" and ultimate success.

Step 4 - Plan for the future:

Finally, you need to address how your organization will handle ongoing adjustments to the salary threshold. Step 4 will absolutely be a crucial input into step 2 and 3, but is important to think about so it's not an ongoing frustration one year after implementation when you have to go through the process all over again.

Key takeaways and actions to consider:

Here are some suggested activities that you should be exploring right now:
1. Audit employees work hours who earn less than the proposed salary threshold.
2. Assess the effect on benefit offerings for employees reclassified as a result of the legislation.
3. Explore additional time tracking capabilities to accurately capture overtime.
4. Consider redefining roles impacted to reorganize the way the business operates vs. simply following the rules and moving forward.
5. Understand your current vs. desired organization culture and how the proposed legislation will influence your business / talent strategy.
6. Think broadly about organizational impacts to discrete job changes (both exemption status and pay changes).
7. Prepare a communication plan for those impacted.

You can follow the rules or take advantage of this change in regulations to truly back up a bit (without consequence) and rethink your direction. Which will you do?

FutureSense, LLC is a management consulting firm specializing in people strategy and organization solutions. Stephen Epling is a senior consultant and Jim Finkelstein is the President and CEO of FutureSense. For further information see www.futuresense.com or contact the authors at stephen@futuresense.com or jim@futuresense.com.