Survey: Employers Are Not Aware of FLSA Change Impact

August 13, 2003 ( - When it comes to the proposed the Fair Labor Standards Act of 1938 (FLSA) amendments, nearly half (42%) of US companies have yet to study the potential impact.

For those companies that have, the examination has been limited at 36% and only 21% have gone so far as to do a quick preliminary assessment of the potential impact of these changes. “This is disturbing given the fact that the proposed changes would require virtually all employers to review their existing job classifications and wage levels to ensure compliance with the new rules,” said Tom Farmer, senior consultant for Hewitt Associates, the firm that polled 268 US companies.

The Changes

The proposed changes from the US Department of Labor (DoL) would be the first comprehensive overhaul in more than 50 years of the “white-collar” exemption tests used to determine whether an employee must be paid overtime or is exempt from the minimum wage and overtime requirements of FLSA. Currently, there are three tests for whether or not an employee is ineligible for overtime:

  • the employee’s level of pay
  • whether or not the employee is a salaried or hourly worker
  • whether or not the employee performs certain job duties.

As the rules stand, any employee making more than $155 a week (about $8,000/year) could be excluded from overtime, if they had a salary and a job description that fell into certain categories.

The proposed regulations would lift the cutoff to $425 a week (about $22,100/year), a step that could add about 1.3 million lower-wage workers to the ranks of people eligible for overtime and could go into effect as early as 2004, according to DoL (See White House Proposes Overtime Rules Overhaul ).

Factoring in implementation costs associated with the new requirements, companies could be faced with costs of $870 million to $1.57 billion, critics have said. However, the DoL disputes these figures, arguing instead that the benefits of increased productivity and fewer lawsuits could mean savings of $1.1 billion to $1.9 billion.

Corporate Challenge

For most companies though, the drawing board is where the problems begin. More than seven out of 10 (72%) of organizations surveyed said they did not know how many of their employees might need to be reclassified if the proposed changes go into effect. When asked the greatest challenges of classifying, updating and enforcing exempt versus nonexempt status:

  • 63% of organizations said interpreting/understanding FLSA rules
  • 52% said insufficient management knowledge of the potential cost of noncompliance
  • 42% said employee resistance to nonexempt, or “time clock,” status.

As a benchmark to anticipate how employers will need to adjust employee policies to comply with the proposed FLSA changes, Hewitt looked at current overtime practices and found that 91% of organizations request that nonexempt employees receive approval before overtime hours are worked. Additionally, when it comes to exempt workers nearly half (48%) of companies surveyed offer overtime to at least a portion of these workers that an average of 33% of exempt employees are eligible to participate in. Further:

  • 34% have a pre-approval policy
  • 33% pay overtime after a set number of hours worked
  • 31% determine whether an exempt employee is eligible for overtime by using employment grade levels.

“As a result of our findings, we expect some employers to adopt more extensive overtime practices for exempt employees under the DOL proposed rules,” said Farmer. “This will be done to keep exempt workers ‘whole’ when their lower-paid peers do the same work but are overtime-eligible due to the increased salary test of $425 per week, compared to the current $155 per week. Some employers may also choose to ‘grandfather’ entire job classifications that may otherwise change from nonexempt to exempt due to the more relaxed proposed duties tests.”

Copies of the Hewitt Associates “Timely Topic Survey on Overtime Practices for Salaried Employees” are available by calling the Hewitt Associates Publications Desk at (847) 295-5000.