Companies Unsure How Proposed FLSA Changes will Impact Business, Hewitt Study Shows.

Business Editors

LINCOLNSHIRE, Ill.--(BUSINESS WIRE)--Aug. 13, 2003

The U.S. Department of Labor (DOL) recently proposed 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 the Fair Labor Standards Act (FLSA). Despite the fact that these revised regulations are expected to go into effect in early 2004, most employers don't know what they will mean for their organizations, according to Hewitt Associates (NYSE: HEW), a global outsourcing and consulting firm.

"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. "In fact, almost all employers will see some financial implication to the new regulations - some as savings, but most as cost, as the DOL upper-end estimates put employers' aggregate net cost of compliance at $1.6 billion (this includes both implementation and payroll expenses). Unfortunately, we're seeing many companies exhibit a 'wait-and-see' approach. Instead, employers should complete a quick assessment of issues now, allowing management and others to be prepared for these potential changes."

Hewitt recently surveyed 268 major U.S. companies (median annual revenue for these organizations is $3.1 billion), and found that 42 percent have not yet examined the impact of the proposed FLSA regulations on their workforce. Meanwhile, 36 percent of the respondents have conducted limited discussions on the topic and 21 percent have done a quick or preliminary assessment of the potential impact of these changes.

When asked the greatest challenges of classifying, updating and enforcing exempt versus nonexempt status, 63 percent of organizations said interpreting/understanding FLSA rules, 52 percent mentioned insufficient management knowledge of the potential cost of noncompliance and 42 percent said employee resistance to nonexempt, or "time clock," status. What's more, 72 percent of companies don't know how many of their employees might need to be reclassified if the proposed changes go into effect.

Current Overtime Policies and Practices

As a benchmark to anticipate how employers will need to adjust employee policies to comply with the proposed FLSA changes, Hewitt's study looked at today's overtime practices and found that 91 percent of organizations request that nonexempt employees receive approval before overtime hours are worked.

When looking at current exempt employee policies, the study revealed that 48 percent of companies surveyed offer overtime to at least a portion of these workers. Specifically, an average of 33 percent of exempt employees at these organizations are eligible to receive overtime pay. In terms of requirements used to determine overtime eligibility for exempt workers, 34 percent of companies have a pre-approval policy, 33 percent pay overtime after a set number of hours worked and 31 percent 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 [phone]. For an analysis of the proposed FLSA changes, which includes a side-by-side chart comparing the current rules with the DOL's proposal, visit www.hewitt.com.

About Hewitt

Hewitt Associates (www.hewitt.com) is a global outsourcing and consulting firm delivering a complete range of human capital management services to companies including: HR and Benefits Outsourcing, HR Strategy and Technology, Health Care, Organizational Change, Retirement and Financial Management, and Talent and Reward Strategies. The firm provides services from 86 offices in 37 countries.

Definitions

Exempt - All salaried employees for whom overtime pay is not required by the Fair Labor Standards Act (FLSA).

Nonexempt - All positions that do not meet the requirements for exempt status, and are therefore subject to the minimum wage and overtime provisions of FLSA.

FLSA Classification and Overtime Pay Best Practices

One of the most significant proposed FLSA changes would increase the minimum salary level to qualify as exempt, so that most employees earning less than $425 per week (as opposed to the current $155 per week) would be nonexempt (i.e., eligible for overtime). In addition, the proposed regulations would create a new, streamlined exemption rule for employees with guaranteed annual pay of at least $65,000. These employees would generally be considered exempt if they meet certain minimum job requirements. In all, employers will see financial implications to the new regulations, mostly as an expense, as the DOL upper-end estimates put employers' aggregate net cost of compliance at $1.6 billion (this includes both implementation and payroll expenses).

Hewitt Associates, a global outsourcing and consulting firm, is in the process of advising companies on how to begin preparing for the new regulations, and suggests the following FLSA classification and overtime pay best practices.

Classifying Jobs as Exempt or Nonexempt

-- Don't rely on grade level or title status as indicators.

Instead, develop good processes, including job descriptions,

and use them.

-- Use a team approach, which includes professionals from the HR

and compensation departments, as well as legal counsel.

-- Look at all incumbents, not just generic job classifications.

Communicating to Managers and Employees

-- Manager training should include basic information about FLSA.

-- Communicate the risks of inaccurate classifications.

-- Keep senior management informed regarding the proposed

changes, and their potential implications.

Conducting Audits and Compliance

-- Audit FLSA compliance annually, especially for jobs with high

staff counts, and jobs created due to merger/acquisition,

internal reorganization or changes in technology or work

processes.

-- Involve legal counsel.