January 1, 2020, is quickly approaching! Your HR department needs to stay on top of many compensation and payroll functions in the first quarter of each year.
In 2020, there is a new factor to consider -- the FLSA Overtime Rule. The U.S. Department of Labor issued a new final rule that updates the earnings thresholds for overtime pay. The rule affects all companies and is effective on January 1, 2020.
Details on the New FLSA Overtime Rule
According to the Department of Labor announcement, the final rule updates the earnings thresholds necessary to exempt executive, administrative, and professional employees from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements.
The FLSA Overtime Rule also allows employers to count a portion of bonuses and commissions towards meeting the salary level.
The thresholds were last updated in 2004. Because of the gap of time between updates, there are significant changes to the thresholds:
- The Standard Salary Level increased from $455/week to $684/week.
- The requirement for Highly Compensated Employees increased from $100,000/year to $107,432/year.
- Employers can now use non-discretionary bonuses, incentive payments, and commissions paid at least annually to satisfy up to 10% of the Standard Salary Level.
A caveat to the incentive payments is that if an employee does not earn enough in non-discretionary bonus or incentive payments in a given year to retain exempt status, the employer may create a “catch-up” payment within one pay period of the end of the 52-week period.
According to the rule, this payment may be up to 10 percent of the total standard salary level for the preceding 52-week period. Also, the catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.
Additional HR Concerns to Consider in the First Quarter
The HR departments in most medium-to-large organizations need to be aware of several other important compensation areas in the first quarter of the year. In addition to adjusting for the FLSA Overtime Rule, make sure you focus on these areas:
- Strategic initiatives and compensation programs aligned with business objectives.
- Budget approval for merit increases.
- Merit increase administration.
- Administering performance bonuses.
- Reviewing, analyzing, making recommendations for pay structures.
- Budget and approval from Board of Directors for annual grant of company stock.
- Executive compensation recommendations.
- Corrections and adjustments from each of these areas.
1. Review Strategic Initiatives
The foundation for determining compensation in a new year is reviewing your organization’s strategic initiatives and designing compensation programs that align with the business objectives.
Make sure you obtain detailed information from senior leadership or the executive leadership team that outlines the strategic initiatives in 2020. This will give your team necessary guidance on how to structure compensation programs that will incentive key employees to help the company reach goals for the year.
2. Budget Approval for Merit Increases
The compensation department is responsible for research, analysis, and recommendations for merit increases in the new year. Then, the merit increases need to receive budget approval.
If your company operates globally, you will need a budget recommendation custom to each country in which the employee performs work. This should be a priority if your organization is in multiple countries to avoid delays.
Once approved, most companies make the merit increases effective on April 1. Your date may vary.
3. Merit Increase Administration
If April 1 is the effective date of the merit increases, the compensation department is responsible for managing the merit increases.
Key functions include budgets, employee data clean-up, system set-up, administration of the process, communication, reporting, seeking approvals, cost impact analysis, creating award letters and notifications, and working with payroll departments to ensure new merit amounts are in the payroll system.
The compensation department may also be responsible for testing each of these functions to ensure the latest payroll data reflects the merit increases.
4. Administering Performance Bonuses
The compensation department performs another critical function calculating, approving, and administering performance bonuses.
Your company likely has KPIs and metrics tied to the bonus plans. The compensation department is responsible for collecting metrics and viewing actual results compared to the KPIs. Also, if bonus plans are tied to individual performance, your team is responsible for obtaining performance ratings.
Then, the compensation team calculates the bonuses, seeks approval, and manages the entire process all the way to stakeholder approval. This typically happens in February to meet the payroll deadline.
If you are a publicly-traded company, you will need the finalized numbers by the end of February to prepare 10K documents. Then, you must pay non-discretionary bonuses by March 15 to write the amount off as an employee expense for the previous fiscal year.
5. Recommendations for Pay Structures
While your team is preparing merit increases and performance bonuses, you also need to be reviewing, analyzing, and making recommendations for forward-looking pay structures.
Many companies perform this function at the end of December or early January in preparation for the merit increase process. This is a fluid process that should include input from multiple stakeholders before making a recommendation for changes to pay structures.
6. Prepare Company Stock Grants
For a publicly-traded company, you will need budget approval from the Board of Directors for the annual grant of company stock to executive shareholders.
The HR or Compensation department should prepare analysis and recommendation materials to present to the BOD for their First Quarter board meeting.
Once the Board reviews and approves the recommendations, your HR department is responsible for administering the should stock grant process to employees.
7. Executive Compensation Recommendations
Your team may perform a compensation study in December or early January to prepare the latest recommendations for executive compensation.
The key is having the recommendations ready for the First Quarter Board of Directors meeting. This way, the Board can review and approve the recommendation in order to retroactively apply the pay increases to January 1.
8. Perform Corrections and Adjustments
There are many important functions in the First Quarter to ensure compensation is handled correctly, fairly, and in compliance.
At the end of the First Quarter, your HR departments should handle corrections, any fallout from the processes such as stock grants, performance management, bonus calculations, salary structure, and merit planning.
Make sure to allocate the time and resources needed for at least one month to perform corrections and adjustments to ensure that every detail, process, and individual is accounted for.
Stay Compliant in 2020
We understand this is a challenging period for any HR team, especially when accounting for the new FLSA Overtime Rule in 2020.
If you have any questions about how to ensure your department is in compliance, do not hesitate to reach out to us. We are here to support your HR needs!