New Effects

 OVERTIME 1Overtime rules will impact the construction industry.

By Mary Beth Saylor

In 2014, President Obama issued a memorandum to the Department of Labor (DOL) to update and modernize the regulations governing the exemption of executive, administrative, and professional (EAP) employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act (FLSA or Act). The primary reasons for the change? Salary levels in the prior regulations were fixed, and there was not a mechanism for keeping them commensurate with the appropriate percentile of average wages today and into the future. Additionally, the change is expected to help accomplish one of the President's goals of ensuring workers are compensated fairly for their work.

The current salary levels have been in effect since 2004 when they went from $250 (set in 1975) to $455 a week. The Department published a notice of proposed rulemaking on July 6, 2015. This generated great interest, and the Department received more than 270,000 comments in response. In March 2016, the Department published the Final Rule to update the regulations. The DOL estimates the Final Rule will automatically extend overtime pay protection to 4.2 million workers within the first year of implementation. This long-awaited update will produce a significant increase to many workers’ incomes. This ruling becomes effective Dec. 1, 2016 so construction companies should begin preparing now, if they haven’t already.

Updated Exemption Tests

Since 1938, the Department’s regulations have generally required that each of the following three tests be met for the FLSA’s EAP exemption:

1. The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary-basis test);

2. The amount of salary paid must meet a minimum specified amount (salary-level test); and

3. The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations (duties test).

It should be noted that the Final Act did not change the duty test in any of the exempt classifications, but significantly changed the salary-level test as well as the salary-basis test. 

The Final Rule sets the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, currently the South: $913 per week or the equivalent to $47,476 per year. In addition, the salary levels are adjusted so that they will maintain the same percentile of weekly earnings of full-time salaried workers every three years, starting Jan. 1, 2020. 

The Final Act will force construction companies to, at a minimum, evaluate how to alter the compensation structure of its salaried employees with salary ranges between $23,660 (the prior minimum salary level) and $47,476. Those employees will either need to be reclassified as hourly employees and paid overtime when necessary or have their salaries increased above the new minimum salary level standard to be exempt.  This could lead to an increase in temporary or flexible workforce employees to meet those overtime needs, and construction company leadership will likely have greater challenges administering schedules to minimize overtime pay.

Additionally, the Highly Compensated Employee exemption will require a $134,004 minimum salary to qualify as exempt (this is based on the 90th percentile of weekly earnings for a full-time salaried worker). The Final Rule also amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. These bonuses must be based on measurable metrics and be paid at least quarterly.

Reducing the Impact

In our experience, we know that many construction companies have salaried office or administrative staff, project supervisors, independent contractors or interns and will be impacted. The options for these employees are:     

  • Raise the salary levels to the new minimum;
  •  Change the employees from salary to hourly;
  • Re-align staff hours and responsibilities to minimize the impact of overtime on the bottom line; or
  •  Explore fluctuating workweek agreements.

One idea that has been discussed by employers involves giving workers who exceed 40 hours a week (during busy periods) time-off when business is slower. Note: This option is specifically not allowed by the Final Rule. The Final Rule does not require that if you convert salaried employees to hourly that you calculate the new rate based on their current salary divided by 2,080 (40 hours a week times 52 weeks) hours. Rather, you can divide the current salary by the expected hours to be worked. The potential issue with doing that is many employees would have an adverse reaction to receiving less pay than they currently received on weeks where overtime is not needed.

Prepare and Comply with the Ruling

We are implementing the following best practices to help our construction clients prepare, comply with and minimize the consequences of the Act:

  • Step 1: Employers should prepare formal job descriptions with clear duties and responsibilities. Even though the duties test for each exempt classification did not change, we find that many construction companies haven’t documented whether their salaried employees meet the duties test in the first place.
  • Step 2: Evaluate the duties performed for each salaried position to be certain the position qualifies to be exempt, regardless of the salary level. 
  • Step 3: For salaried employees that meet the duties test, but do not meet the minimum salary requirements, determine the best alternative between changing their status to hourly and paying overtime as needed or increasing their salary to the minimum level.
  • Step 4: Assess all independent contractors to determine if they qualify as independent contractors under the IRS 20 factor test. If they do not, construction companies should complete the above steps for those employees.
  • Step 5: Once a construction company has evaluated the status of its salaried employees, meet with the affected employees to explain the new regulations and how it impacts them as well as the organization.

The Department estimates the new regulation will increase wages $1.5 billion annually, with $1.2 billion in increased overtime pay (or $285 per impacted employee) and $300 million in corresponding administrative costs. With America's approximate $8 trillion in annual wages, the overall increase is minimal, but will certainly impact certain industries more than others, such as the retail, hospitality and restaurant segments. However, that doesn’t mean other industries, such as construction, can afford to ignore the impact and not prepare prior to the December 1 deadline.

Mary Beth Saylor, CPA is a principal of Windham Brannon, an Atlanta-based provider of tax, audit and consulting services to individuals and organizations. She specializes in the construction and real estate industries. She can be reached at (678) 510-2803 or msaylor@windhambrannon.com.

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