Everybody should know by now that the Department of Labor (DOL) has proposed raising the salary threshold for exempt employment to $970.00. For a fuller review of the proposal, read our post last year entitled “DOL Proposes Overhaul to Overtime Rules” Current projections indicate that the final rule will be published in mid-summer with a 60-day implementation period.
It’s time to stop wringing our hands over this impending change and get busy figuring out how to deal with it. There are plenty of options.
THE CHANGE
Under existing regulations, employees are exempt from minimum wage and overtime requirements under what are called the “White Collar Exemptions” if they meet both elements of a two-part test:
– The employee must perform bona fide executive, administrative or professional duties; and
– The employee must receive a weekly salary of at least $455.00 (not prorated for part time).
Other exemptions exist for such categories of workers as computer professionals, outside sales employees and highly compensated employees but they have other qualifying factors that are not relevant to the changing threshold.
The DOL’s proposed change more than doubles the exemption threshold, meaning that a large number of employees who are now considered exempt based on their current salary will not be exempt when the change is implemented because they are not paid at least $970.00 per week ($50,400 per year). In addition, the threshold will continue to increase under the DOL’s proposal because it will be indexed for inflation.
SOME EASY FIXES
In many instances, the solution is relatively simple, especially where employees do not regularly approach the 40-hour overtime threshold. Two options leap to mind:
Leave things alone – For your current exempt employees who typically do not exceed forty hours in a week (perhaps because they are part time or their jobs just do not require extra hours), simply convert their salaries to an hourly rate by dividing their weekly salary by their average hours per week. Then just have them start recording their time like your other nonexempt employees.
Give them a raise – For those whose current salary is close to the new threshold, consider just raising them up to meet the new standard. This may not cost very much in comparison to the expense of paying overtime at a relatively high hourly rate. For example, an employee currently paid an annual salary of $48,000 need only be given another $2,440 to reach the exemption threshold.
On the other hand, if you decline the option to provide a raise, you must convert that $48,000 annual salary to a wage rate of about $23.00 per hour. If this employee averages 2 hours of overtime per week at time-and-a-half ($34.50 per each hour of overtime), that’s $69.00 x 52 weeks = $3,588.00 of annual overtime, more than $1,000 higher than the simple raise needed to maintain the exemption. Of course, the disparity becomes even greater as the employee’s average overtime increases.
WHEN “EASY” DOES NOT WORK
What do you do for employees who work long hours but are paid a salary that precludes just offering a raise to meet the new exemption threshold?
For example, consider a currently exempt employee earning $31,200 per year and regularly working 45 hours a week. Just offering them $19,240 to meet the exemption minimum is probably out of the question so you decide to convert their salary into an hourly wage which comes out to $15.00 per hour ($31,200/2080 hours). Since the overtime rate is $22.50 per hour (1.5 x $15.00), you will end up paying an additional $112.50 for 5 overtime hours each week, or $5,630.00 per year. That could strain a labor budget for a small organization, or even that of a bigger employer if there is a large number of employees who fit this scenario.
Option 1 – Why not consider a different conversion that takes into account both the straight time and the overtime rates? Tell the employee “You are no longer exempt and are now eligible for overtime. However, we set your salary at what we could afford to pay and we simply can’t absorb additional cost. So, we are going to establish a lower hourly rate so that the total of all straight time over the year plus the required overtime pay will come out to about the same as what you have been paid as salary.”
Using the $31,200 salary in the above example, instead of dividing the salary by 2080 (the full time number of hours at 40 per week), just set that employee’s wage at $12.75 per hour ($26,520 annually). You still have to pay the 5 hours of overtime every week but now it would be at an overtime rate of $19.125 per hour (1.5 x $12.75) for a weekly total of $96.63. That works out to be $4,781.25 per year in overtime payments which, when added to the annual wage of $26,520, results in a yearly compensation of $31,301.25 – pretty close to the original $31,200 salary. Those with excellent math skills can probably refine these calculations down to the last penny.
Option 2 – Another possibility would be to pay the employee as a salaried worker but agree at the outset that the salary covers 45 hours of straight time. In the above example, an annual salary of $31,200 comes out to $600.00 per week. When the employee was exempt, that salary covered their average 45-hour week so why not agree that the same is true now? You would still owe overtime for hours 41-45, but since you have already paid the straight time amount for those hours, you don’t owe time-and-a-half. Instead, you only owe the additional 0.5 premium ($13.33 per hour x 0.5 = $6.67) for each of those hours. Total overtime liability would be $33.35 per week, or $1,734 per year, a fairly minimal increase that essentially saves the employer about two thirds of anticipated overtime cost merely by defining the salary as covering 45 hours instead of 40. If need be, the salary could be lowered ever so slightly so that the overall payments will not exceed the annual amount the employee receives currently.
Option 3 – An even more intricate option exists called the “fixed salary for fluctuating workweek” plan. This operates much like the salary concept described above except that the number of straight time hours covers all of the hours worked in a week regardless of the number. The more the employee works, the lower the 0.5 premium will be for the overtime because the fixed weekly salary is divided by a larger denominator. This plan can only be used in specific situations where the number of hours in the employee’s work week varies and where there is a clear understanding with the employee that the salary covers all such hours. The employer must also be sure that the salary does not fall below minimum wage when divided by a large number of hours in a week.
Option 4 – if the math seems too overwhelming, you still have the choice of restructuring jobs, reducing hours, creating job-shares or undertaking any other method of insuring that employees who will no longer be exempt are not likely to incur overtime. This may involve fairly significant restructuring, and employers must be sure to comply with any and all labor contracts, policy manuals, individual agreements and other similar items that might limit the ability to implement such changes unilaterally.
BOTTOM LINE
There is no time to wait. Employers should start reviewing jobs right now to determine which jobs can be upgraded to meet the new threshold, which jobs require recalculated compensation and which jobs can be reduced, merged or changed. The new rule will be here before you know it.