Shifting Salaries

Buffy Owens of Kamaaina Kids was meeting with consultants from the HR management company ProService Hawaii when news broke that the federal government would update the Fair Labor Standards Act by doubling the minimum pay for salaried employees. Without missing a beat, the original focus of the meeting went out the window, and discussion immediately shifted to the new rules and how Kamaaina Kids would be affected.

Owens says she didn’t need a consultant to tell her that, even with a six-month lead time, bringing her 1,000-employee company into compliance with the new standards would be a challenge.

That same challenge – and concern about what to do – is faced by thousands of owners and managers of companies and nonprofits across Hawaii.

On Dec. 1, 2016, new rules will take effect under the federal FLSA, setting the minimum pay for salaried employees at $47,476, a little more than doubling the current threshold of $23,660. For employers, the change means each salaried employee earning less than the threshold must either receive a raise that brings their salary at least up to the new minimum, or have their pay structure changed to an hourly rate – entitling them to time-and-a-half for any hours worked beyond 40 a week.

An estimated 57,000 employees in Hawaii will be affected by the change, or around 26 percent of the state’s salaried workforce, according to research by the Economic Policy Institute.

The new rules also establish automatic updates to the minimum salary every three years. Twenty-one states sued the federal government in September, seeking to block the new overtime rule (Hawaii was not among them). Owens says she is closely watching the lawsuit, but     Kamaaina Kids is still doing everything it can to prepare to comply with the rule change. “We’re moving forward with the understanding this is all going to happen, but it’s interesting that there’s some pushback from people saying this might be a little too much, too fast,” she says.

Kamaaina Kids is a nonprofit aimed at providing child care, education and enrichment programs for children. About 1,000 employees work statewide at 25 pre-schools; 80 after-school programs; activity programs and a food truck at two state parks; plus a nanny service that provides child care to tourists in Waikiki and on Maui. “We have such a diverse working population,” Owens says.

“Each of those working environments is different,” she says. Some employees work weekends or nights, others work full time, many part time  and some overtime. The hours for hotel babysitters might change wildly from week to week, while employees of after-school A+ programs often work in school cafeterias, where they don’t have access to electronic time-clock systems. “Many of our employees work more than one job for the company as well,” she says.

“We needed to spend time researching how it would impact each group of employees,” she says. It turned out, about 10 percent of the nonprofit’s workforce would be affected by the rule change.

“Ten percent of a half-million-dollar payroll (per pay period) is a lot of money,” she says.

Kamaaina Kids is not the only employer that started preparing early for the transition. “From the time the proposed rules were released, savvy employers were already starting to plan ahead,” says Sheri-Ann Lau Clark, VP, corporate secretary and general counsel for the Hawaii Employers Council.

A survey of more than 100 HEC members in June, just a month after the rule change was announced, found 55 percent of employers had already begun communicating with affected workers. “I thought that was pretty amazing,” Clark says.

At that point, only 7 percent of employers were initiating changes to their benefits programs, while 67 percent did not plan any changes, and 26 percent were unsure.

Employers have been asking for training and classes on the new rules and the exemption requirements for salaried workers, Clark adds. “They’re looking for a refresher. What is it that’s permissible?” she says.

Debbie Padello, director of operations at Simplicity HR by Altres, says she’s fielded a lot of questions about the rule change from employers. “We’ve been keeping them in the loop,” she says. “As we’re getting closer to the effective date, more businesses are looking at ways to make sure they stay compliant so it doesn’t affect their bottom line unnecessarily.”

On the other hand, Ben Godsey, CEO of ProService Hawaii, says many employers were still learning about the issue in October – less than two months before the change takes effect. “People have heard about it, but they generally don’t know the impact,” he says.

His company has been reaching out to clients to help them determine how many employees will be affected and what to do. “They’re often learning about it for the first time when we bring them that education, so my belief is that most businesses have heard a little, but really don’t understand it yet,” he says.

The impact on Hawaii businesses varies widely, experts say. Many companies already have compensation structures that meet the new requirements and won’t be affected, Padello says. “But then you have another large group of employers for which this is a huge change,” she says. “They may not have the job descriptions in place, they may not have classified employees correctly or even know how to classify employees. So changing for them is more challenging and it does feel overwhelming.”

Many larger companies are conducting workforce audits to determine if any employees are affected, Padello says. “Just one employee out of a 150-employee company could make them not compliant.”

Godsey says slightly more than half of ProService Hawaii’s 2,000 clients had affected employees. “Some have a good number of impacted employees; others will just have one or two,” he says. “It’s all over the board.

“There are folks that, if you wanted to keep them exempt, would need a 30, 40 percent increase in pay. Or other people were happy being exempt, and now they’re going to need to go hourly,” he says. “Other folks, if their pay is relatively close to the threshold, they may say, ‘OK, we’ll just bump up their pay a few thousand dollars and keep them exempt.’ ”

That was the case for a few of the affected employees at Midas Hawaii, says GM Tim Hall. “We gave them raises, because they were so close to start with,” he says. In other cases, employees were converted from salaried to hourly. Making the change was fairly straightforward, Hall says. “The money ramifications are going to have to be later on down the road. It depends on how well we manage our overtime, how well we manage the time clock we have in place.”

Midas Hawaii has around 100 employees at seven stores on Oahu, two on Hawaii Island and one on Kauai, plus corporate offices, and is a client of ProService Hawaii. Around 10 percent of Midas’ workforce will be affected by the FLSA change.

“We’ve known about it for a while,” Hall says. “I knew it was coming from the news, and (ProService) got with me as early as possible to try to head it off before it became an issue for us.”

Larger companies may find the FLSA rule requires a reassessment of their entire compensation systems, Clark says.

Some companies may have salaried employees like analysts or administrative assistants spread across several departments, but some departments will be affected while others aren’t. Can the company adjust the salaries of some without changing all? In other cases, changing some workers from salaried to hourly may result in those employees earning more than more senior managers. “As you move up the bottom layer, what happens to all the other folks who were in layers above them?” asks Clark. “You’ve got to think about how it is going to impact others in the workplace, how it impacts the whole compensation system for the company, and the larger the company gets, from my observation, it seems the more complex it becomes for these employers.”

While employers may have been thinking about the issue for months, many haven’t yet solved the problem. “I think a lot of large employers are still, quite frankly, trying to figure out what to do with some of those employees,” Clark says.

Godsey notes the FLSA rule change is just one issue affecting labor costs for employers, who are also facing another minimum wage increase, to $9.25 an hour, beginning Jan. 1, 2017. “There are a number of labor cost changes going into effect that are impacting large numbers of employers in the state, and it’s a significant headwind for people trying to forecast their business performance,” he says.

Employers also need to think about how their salary and overtime costs will be affected when the federal salary threshold is updated again in 2020, Clark notes. The method employers choose to address the issue today could have larger ramifications in years to come, she says.
“It’s a really important time to be planning ahead,” Godsey adds.

So what’s the starting point? Padello says employers need to first determine if workers are classified correctly, and then check whether they meet the new salary requirements.

If the affected employee typically works 40 hours a week or less, changing him or her from salaried to hourly can be a simple fix, she says. But if the employee works a lot of overtime, things get more complicated. Then, employers should do the math and determine whether it will cost more to pay overtime or bump the salary above the threshold. “That’s not always an easy pill to swallow,” Padello acknowledges.

In some cases, the employer can estimate how much overtime the person will work, and factor it into the hourly rate, so that the total should approximate what the person was earning before. “You do a little math and you work backward,” Padello says.

Some employers may cut back on workers’ overtime by hiring more people to share the load, she adds.

Employers need to think about not just the changes they need to make, but also about how they will communicate those changes. For most employees, pay is a sensitive topic, so it might be a conversation better handled in one-on-one meetings, not a generic email. “It’s an opportunity to really talk to the employee and let them know they’re not being demoted, their salary is not being cut,” Padello says.

Whichever way you decide to handle it, don’t wait, Godsey says. “I would say get started on it now,” he says. “If you’re responding to this at the last minute, if you haven’t budgeted for it, you may not make the best choices.”

The changes may represent increased costs and paperwork for employers, but what about the workers? Padello says many employees are unaware of the change or are waiting to see how they will be affected. With Dec. 1 approaching, it’s time for employers to start having the conversations and educating employees about how the change affects them, she says. “We do have some employees who say, ‘I’m going to get a raise!’ But that may not be the outcome. It really depends on the circumstances,” Padello says.

Hall says it’s still too soon to know employee reaction at Midas. So far, he’s received “Just questions, no pushback,” he says. “Employees worry about one thing: Is my paycheck going to be the same?” he says. He expects three or four pay cycles before employees settle into the new system. “Once they figure out they’re working the same hours and their pay is not impacted, they’ll be fine with it,” he predicts.

Nicole Woo, senior policy analyst at the Hawaii Appleseed Center for Law and Economic Justice, notes that federal overtime rules were originally established to protect employees from being asked to work long hours without pay.     Yet by classifying workers with managerial, administrative or professional duties as salaried employees, businesses could avoid the overtime requirement – even if the employees spent only a few hours a week on managerial tasks, with the rest of their time spent on stocking shelves or working a cash register.

The salary threshold hasn’t been updated in more than a decade, she notes. “People were being left behind, and many people were working a lot of overtime and were not being compensated,” Woo says. “If you think about the idea that people could be earning less than $30,000 a year, working crazy hours, and not getting a dollar of overtime, it just needed to be changed.”

Back at Kamaaina Kids, Owens says she is working with ProService to figure out what changes are needed to bring each group of affected employees into compliance. “We have to track their hours, give them raises, or make sure the incentive money that is paid quarterly will equal what it would be to get them to the correct amount by the end of the year,” she says. “I’m not sure it’s solved yet.”

Even if the challenge seems daunting, local employers should take the rules seriously and do what it takes to comply, Padello says, noting that the federal Department of Labor and other enforcement agencies have been very active in Hawaii. “Maybe in bigger states you could fly under the radar, but not here,” she says.

WHO’S AFFECTED?

The Hawaii Employers Council’s survey in June of more than 100 local employers found that 43 percent were aware of salaried employees working more than 40 hours per week, yet paid under the new minimum salary. The 57 percent of employers surveyed were unsure if affected employees were actually working over that 40-hour threshold.

Of the jobs affected, most were administrative (35.7 percent), followed by supervisory (27.4 percent). Managers (17.9 percent), professionals (15.5 percent) and directors (3.6 percent) comprised the rest of the affected jobs.

Employers planning to change their compensation programs say they intend to take these actions:

53%: Adjust salaries to the new threshold;

40%: Reclassify salaried jobs to hourly;

51.3%: Restrict overtime;

32.9%: Modify job duties and assignments;

32.5%: Reclassify affected jobs to salaried nonexempt status;

8.1%: Adopt fixed salary fluctuating workweeks.

These percentages total more than 100 percent because many companies planned to implement multiple changes.