On May 17, 2016 the US Department of Labor published The Final Rule, updating the Fair Labor Standards Act (FLSA/Act). The updated Act will have a profound impact on organizations in the retail industry with annual gross sales of $500,000 or higher.
THE IMPACT TO RETAIL ORGANIZATIONS
While these changes to the FLSA should come as no surprise to most retail organizations that meet the annual gross sales volume, the changes are likely to have significant impact on individual retail businesses.
One of the first impacts a retail organization will realize is the significantly increased number of employees who could be considered hourly because they fail to meet the expanded base salary level of $913/ week or $47,476 annually. Approximately 2 million US retail workers will need to be reclassified from exempt to hourly.
To ensure employees are classified (and eventually paid) correctly, retail organizations will need to track actual hours of currently exempt employees who may need to be reclassified. This will contribute to increased short- and potentially long-term payroll and administrative costs.
Perhaps, the greatest impact will be employee engagement challenges as organizations develop and implement a strategy to adjust to the FLSA changes. While there is a bit of time to create a calculated response to these two impacts, the greatest impact to employee sentiment must be addressed quickly and positively.
Employees are learning about the Act updates through various channels, and many may not correctly understand how the changes will impact them personally or how their employer will implement changes to become compliant. The anticipated changes and lack of understanding could heighten anxiety among already nervous employees. Compounding the issue, currently exempt employees may feel that the business is trying to downgrade their positions by asking them to record work hours when in the past they were not required to do so.
Fair Labor Standards Act Requirements
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 ("Salary Base Test")
2. The amount of salary paid must meet a minimum specified amount ("Salary Level Test")
3. The employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations ("Duties Test")
Furthermore, as organizations determine what changes they will make in response to the Act and to maintain their overall payroll expense, they will likely contemplate changes to job roles, titles, responsibilities, schedules and benefits. These changes could cause employees to experience challenges in role clarity as accountabilities and responsibilities are adjusted to accommodate the new requirements. Without the appropriate planning and communication of changes, employees may not understand their new role or expectations creating confusion, possible inefficiencies and low morale.
A significant number of employees may now be considered hourly
Overtime will need to be tracked and managed for this group of employees
Employees may become disengaged if actions and communications are not proactive
Workforce may need to be evaluated to maintain payroll costs and pay equity
Decide among several strategies to adapt to the new FLSA rules, including:
- Raise salary and keep the employee exempt from overtime
- Make no changes and pay overtime in addition to the employee’s current salary when necessary
- Evaluate and realign hours and staff workload and possibly limit hours to 40 per week
To decide which strategy is best, retail employers should:
- Review employee classifications: Any exempt employee who earns more than the threshold amount ($47,476 under the new rules) may remain exempt from overtime pay if that person primarily performs executive, administrative or professional duties
- Monitor currently exempt employee hours: This can provide an understanding of the amount of hours over 40 or understanding of the total hours each person is currently working and how employees are spending their time.
- Weigh the costs of raising employees’ salaries to meet the new salary requirements versus what it may cost to reclassify them as nonexempt and pay them overtime.
- Analyze the impact on external and internal pay equity: Consider how the existing balance in pay equity will be maintained within departments and within the labor market place.
THE CRITICAL FOCAL POINTS
GUIDE EMPLOYEES THROUGH THE CHANGE
Retailers should focus on their employees and customers. Develop an integrated change management plan.
- Ensure there is a visible, active sponsorship at all levels for the changes that will be needed to meet the challenge.
- Create a communications strategy and plan that provides factual information about the FLSA changes, delivers a high level description of the map the organization will follow to adapt to the new rules and gives employees easy access to voice concerns and/or get more detailed information.
- Have both formal and informal methods for ensuring employees’ needs are heard and considered, and that feedback is provided on actions taken as a result.
- Create new ways of working as the organization changes to adapt to the new FLSA rules.
- Identify an overall approach, materials and resources to support employee adoption of the new FLSA changes and to reduce any productivity loss due to change.
CONTINUE TO SUPPORT CUSTOMER EXPERIENCE
Concurrently, organizations should be focused on creating ways to ensure their efforts support the overall customer experience. It is imperative to assess organizational and operational changes along with the inherent changes to roles and responsibilities against the desired customer experience. Important questions to ask:
- How will these operational or business process changes impact our employees’ ability to provide each customer with a great customer experience?
- Do these business process design changes impact our overall brand strategy?
- How can we potentially redesign and improve the customer experience using insights from analytics that also reduces waste and rewards our employees?
- Are there new technologies available to help us meet the requirements of the Act while enhancing our employees’ and customers’ experience with our company?
- Which, if any, changes should we communicate to our customers? How should we communicate them?
DEEP ORGANIZATIONAL ADAPTION
TAKE A HARD LOOK AT IMPROVING OPERATIONAL EFFICIENCIES
The best approach is one that combines both a top-down holistic review of an organization’s Operating Efficiency Ratio (OER), and a focused “bottom-up” quantification of key process improvement opportunities.
SEEK TO CONTROL COST
Identifying and eliminating waste is a best practice at any time but is even more important during times of intense change. Examine the efficiency with which functional departments and business lines use corporate resources. As processes are updated and streamlined, this may also be time to reblanace the business's organization chart to ensure employees are aligned with the new operating model.
LEVERAGE STRATEGIC WORKFORCE PLANNING METHODS
Evaluate the need for organizational and/or role changes and develop a holistic human capital strategy that encompasses:
- Using organizational diagnostics to clarify the changes required to be compliant with the Act and align with the broader vision and strategic priorities creating a clear functional model of changes to the organization.
- Identifying and targeting the right workforce at the right time by shaping the structure needed to achieve success in compliance with the law, define accountabilities and responsibilities, and plan the workforce transition.
- Facilitating collaboration sessions to clarify the accountabilities and responsibilities within the organization and key interaction points to provide a common understanding of key functions.
- Mobilizing multiple workforces (full-time, contingent, etc.) in a strategic yet rapid and agile manner.
Retailers should not wait until December. By being proactive, they may reap great benefits including:
- Ensuring employees and customers receive timely and accurate communications that fully inform them about the direct and indirect implications of the Act on business and employees.
- Assessing potential impacts and designing various responses to determine the best strategy for the business, its employees and customers.
- Implementing a comprehensive operational and human resource plan that allows the business to meet the requirements of the Act and to drive out hidden waste and cost.
- Engaging the workforce to help shape and develop the response, which can lead to improved employee engagement and productivity.
- Ensuring the desired customer experience is maintained during a time of major industry change.
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