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March 10, 2004
What Will the New FLSA Regulations Cost You?

Legal Editor, Business & Legal Reports

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We keep hearing how the new regulations to the Fair Labor Standards Act (FLSA) will cost employees a bundle in time and implementation costs, but what does this really mean to you in dollars and cents? According to an initial estimate by the U.S. Department of Labor (DOL), the changes to the FLSA regulations may cost employers as a whole between $870.3 million and $1.576 billion. That's a lot of money, and some industries will be hit harder than others.

So, what will your company's costs be? Will the final regulations bring you any immediate or long-term reductions in cost? Are there actions you can take to minimize your costs? Read on to find out how the regulations may affect your company and what you can do about it.

Costs to employers

The DOL acknowledges that most employers will be affected by the new regulations to the FLSA. Those few who will not be affected include self-employed individuals and certain railroad workers, agricultural workers, persons in the transportation industry, persons working in automobile dealerships, and most federal employees. Almost all others employers, though, will be affected. At the time of its initial proposal, the DOL estimated that approximately 6.5 million business establishments will incur costs from the regulations.

What types of costs are they talking about? Some costs will be one-time implementation costs and other costs will be ongoing for an indefinite period of time. Employers and human resources professionals will face a variety of increased costs now that the regulations have been issued. These will include:

  • Devoting time to reading and understanding the new regulations
  • Updating corporate overtime policies to comply with the FLSA changes
  • Establishing communication between employers and employees about the benefits of qualifying as an exempt or nonexempt employee
  • Reviewing job categories and job descriptions to classify them as either exempt or nonexempt
  • Paying overtime to those employees who previously exceeded the old salary threshold but will now fall below the $455 per week salary level
  • Increasing the salaries of certain employee groups to raise them above the salary threshold to classify them as exempt
  • Facing lawsuits by employees who claim they qualify for overtime under the FLSA

Who will be most affected?

These costs will not be shared proportionately by all industry sectors. The personal services and automotive repair industries may fare relatively well compared to the healthcare and construction industries. This is because low-wage industries will likely have more individuals fall within the nonexempt categories and, therefore, will be hit with fewer misclassification lawsuits for mistakenly classifying employees as exempt.

However, the low-wage industries will likely face greater increases in the number of employees who will be entitled to overtime once the regulations are passed. In companies where overtime hours are commonplace, employers may be hit hard with increased overtime costs.

DOL says some costs will decrease

The good news is that the DOL believes that some of your current costs may actually decrease, because the new regulations will be easier to understand than the current regulations. Many groups disagree with this. Nonetheless, let's take a look at the ways your costs as an employer may decrease.

First, since the administrative, executive, professional, outside sales, and computer exemptions are arguably easier to decipher than the current regulations, the DOL states that corporations will need to employ fewer human resources professionals and spend fewer hours on the task of classifying employees as exempt or nonexempt.

Second, the DOL claims that corporations will incur lower legal costs because they will be able to classify their own employees rather than hiring legal counsel to do so.

Third, under the newly clarified regulations, employers will classify their employees correctly up front and, therefore, will not face the staggering million-dollar lawsuits recently experienced by several well-known employers including Starbucks, Radio Shack, Perdue, Wal-mart, and the United Parcel Service. In addition to settlement costs, employers will also have reduced administrative costs that are associated with handling private claims and DOL audits.

Fourth, the final regulations include an automatic exemption for employees earning $100,000 per year or more and who fulfill just one of the duties tests either in the administrative, executive, or professional categories. Employers will no longer need to pay overtime for the hours these employees work in excess of 40.

Lastly, some employees who were previously classified as nonexempt will now fall within the administrative, executive, professional, outside sales, or computer exemptions. Employers will no longer have to pay overtime to these employees for their hours worked in excess of the standard 40.

Minimizing the damages

So how can you minimize the costs you will likely face under the regulations?

  • In certain cases, it might be to your advantage to raise the salaries of a group of employees to the $455 per week threshold in order to push those employees into the exempt category. This would be particularly beneficial in cases where employee groups typically work more than 40 hours in a given week
  • There may also be situations where it would be in your best interest to adhere to a 40-hour workweek for certain employee groups, rather than paying them time-and-a-half in overtime pay.
  • You will also have the option of changing the job descriptions and job duties of certain employees to fit them into the preferred classification for the position in question.

Each of these attempts to mitigate your costs will require an understanding of the final regulations, an examination of the job in question, and a cost/benefit analysis to determine the best way to handle each individual situation. This in and of itself will cost you money, but some of the extra time and money spent up front will help you to reduce your overall costs in the long run.

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