Operations

Overtime Exemption Changes in Late 2016

November 2016, Work Truck - Feature

by Bob Stanton

Photo: iStockphoto.com
Photo: iStockphoto.com

Change has become the new normal in the automotive and trucking industries. Just this year, we finally have most of the rules covering electronic logging devices (ELDs), are preparing for new motor oil classifications, have the new greenhouse gas (GHG) Phase 2 rulings and, on December 1, our employee population will be subject to new Department of Labor (DOL) standards covering overtime.

It is not surprising you may seem shell-shocked as each of these rulings can impact your business significantly.

In this article, the new rules governing overtime standards and changes will be explained, including how to adjust compensation programs to ensure compliance.

Understanding What Happened

In response to numerous court rulings and challenges, largely from the restaurant and hospitality industries, the DOL (under the Fair Labor Standards Act) has modified the definition of exempt employees, increasing the exempt compensation level threshold and adding qualification “tests” to further define the qualifications of an exempt status employee. This rule becomes effective December 1, 2016.

It is estimated these changes will impact 4.2 million employees and have particularly negative effects on small businesses, non-profits, and small local governments.

An exempt employee is typically on a fixed salary and classified by their employer as being “exempt” from overtime. Your business likely has several employees in this classification.

Under the current rules, an employee with an annual gross salary less than $23,660 is eligible for overtime pay of time-and-a-half for every hour they work more than 40 hours in any given week. Employees paid above the current threshold can be classified as “exempt” by their employer. Exempt employees are not eligible for overtime compensation for hours worked more than 40 in a given week.

In the automotive/truck/equipment repair world, employees working as shop supervisors, lead technicians, assistant managers, service writers, parts managers, and others share this exempt classification and typically work in excess of a 40-hour workweek.

Under the new rule, because the threshold increases to $47,476 on December 1, all employers should evaluate their classification standards, especially for currently exempt classified employees whose annual salaries currently fall below $47,476.

Complicating this change are two new “tests” to further determine exempt qualification. First, the employee must be paid a fixed salary and, second, their duties must be primarily administrative and professional. Briefly, the definitions of those two terms are as follows:

  • Administrative: Duties related to the management of general business operations using discretion and independent judgment.
  • Professional: Divided into either “learned” (highly educated college) or “creative” (artistic) sub-groups. It is unlikely a journeyman technician/diagnostician would be accepted as such by the Department of Labor, although in our vernacular they are highly educated. 

In an automotive/truck/equipment repair environment, a manager or general manager may qualify for exemption but the remainder of the staff such as assistants, leads, parts personnel, foremen, etc., would likely be classified as blue collar and qualify for overtime under the new rule.

For shops that typically work beyond a 40-hour workweek, either to enhance service levels or provide longer daily coverage (e.g., open Saturdays for a half-day), this rule will have a major impact.

Strategies for Ensuring Compliance

Fleet managers have a number of strategies to consider to ensure compliance.

First, immediately evaluate your population of exempt employees, paying particular attention to where each employee’s salary falls in relation to the old and new thresholds, job description, and actual duties (which often vary from the job description) and whether they typically work longer than a 40-hour workweek.

Based on the results of step 1, several options can be considered either through reclassification and/or salary adjustments. They are:

  • Increase employees’ base salary(s) to the new threshold or above to maintain the exemption.
  • Convert employees whose salaries fall beneath the new threshold from a base salaried pay rate to an hourly pay rate based on dividing their base weekly salary by 40. They will now be eligible for overtime pay at time and a half for hours worked more than 40 each week.
  • For employees who work a 50-hour workweek, an employer is allowed to convert their salary to hourly based on a 50-hour week but this may seem unfair, especially if their work hours sometimes fall below 50 in a week as their annual salary could decrease.
  • Convert salaried exempt employees to salaried non-exempt by changing their classifications. The employer will still pay overtime for hours worked more than 40 hours and, for weeks when the employee works less than a 40-hour week, the employer will still have to pay the employee for 40 hours regardless.
  • Next, adjust work hours and employee schedules to limit or eliminate time worked over 40 hours.
  • Employers utilizing commissions within their salary structure (e.g., dealership service writers) are allowed to count commissions but only up to 10% of the minimum salary calculations. There are special rules governing this aspect. 

Because the new threshold ($47,476) can be changed every three years as part of this new rule, employers should consider scheduling, at the very least, a reevaluation of exempt employees, as described in step 1, every three years. The DOL estimates in three years the threshold may top $51,000.

So, what are the risks? Although there are no stipulations as to fines or penalties for non-compliance, the DOL expects both employers and employees to police themselves. Employees who feel they are not being treated fairly should be expected to file a discrimination claim from which fines and/or penalties may result.

Additional Considerations

Many employers provide a higher benefit level to exempt employees because they typically work longer hours. As exempt employees are reclassified as hourly or salaried non-exempt, employers will likely reevaluate the benefits provided to those same employees and may likely bring changes to their benefits as well.

All salary and/or classification adjustments should be made with fairness and equity considerations given to all concerned. If salary or classification adjustments are made to only accommodate the business needs for convenience and/or applied to individual employees without regard to the impact on employees whose compensation is not affected, the employer is clearly asking for trouble. Further, employers should always be cognizant of how these changes may impact protected class employees and ensure equity is applied across their employee group.

Employers should maintain an accurate time-keeping process, especially if they move employees from exempt to non-exempt status. This includes a time-recording mechanism when an employee is responding to e-mails, text messages, and phone calls, etc. All of these activities are considered by the Fair Labor Standards Act as time worked as are, in some cases, traveling and working on-call.

A robust and accurate time keeping system must be made available to employees who wish to verify and validate their time to minimize disputes. A dispute mechanism process, if not already in place, should be implemented.

Many employees treat their exempt status as a source of pride. Employers should be sensitive to this when reclassifying exempt employees as non-exempt, especially if their benefits are modified correspondingly. As with any organization-wide change, constant and thorough communication with the employee population is key to any successful change.

This is particularly important should the employer lower the salary of an employee that typically worked more than a 40-hour workweek. Employers should be prepared for the expected reaction from any employee whose salary is reduced.

Finally, and as you know, employees will discuss these changes among themselves. Both federal and state law allows them to do so without reprisal. This makes full and open communication vital to the success of whatever strategy is selected.

Shops that charge for their services, dealerships, independents, and the like should clearly understand the financial impact of whatever strategy they implement. This rule will likely increase their cost of doing business and, as such, may require an adjustment to their hourly fees assessed to customers. Employers who rely on a flat-rate fee charge mechanism might wish to consider incorporating a bonus incentive if their employees’ salaries fall in between the old and new thresholds.

It should be noted that 21 states recently filed suit to block implementation of this rule, citing it violates the 10th Amendment; however, the short timetable until enactment in December makes employer development of an implementation strategy sound policy. 

Editor’s note: This author recommends employers seek advice from an accountant, labor attorney, or other subject-matter expert to ensure their strategy results in full compliance and across-the-board equity. When comfortable that the strategy is sound, have a plan to fully inform the group that represents your greatest asset, your employees.

About the Author
Bob Stanton, CPM, CPFP, is an independent fleet consultant and retired public sector fleet manager with 42 years of experience. He can be reached at [email protected].

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