Andrew Spikes, CPA
The new overtime rules issued by the Department of Labor will soon be in effect. Beginning December 1st of this year, the new salary threshold to avoid paying overtime will increase from $455 per week to $913 (an annual salary of $47,476). As with most new federal guidelines, there has been some push back from states and the business community. Just last week, twenty-one states filed suit against the Department of Labor to attempt to stop the implementation of the new overtime rules. It’s unlikely that a final determination will be made before December 1, so it’s in your best interest to be prepared to comply with the new regulations by the deadline.
What works for one business may not work for another. Some might decide that raising salaries above the threshold is better than tracking hours and paying overtime. Others might choose to limit workers to 40 hours and hire additional staff to fill in as needed. A slightly more contentious alternative would be to reclassify workers as nonexempt and pay the overtime, but cut base salaries or other benefits to compensate. This option has the appeal of being relatively cost neutral but is more complex—leaving employers feeling overwhelmed. To help in this process, below are several considerations to keep in mind as you bring your organization into compliance.
Determining a new hourly wage. It’s not as simple as dividing an employee’s annual salary by 2080 hours (40 hours x 52 weeks). Exempt employees probably work more than 40 hours per week on the average, so those hours need to be taken into account using the overtime rate of 1.5 times the hourly rate. For example, if an employee normally works 45 hours per week and you anticipate that will continue, then set the new hourly rate at a level that makes the employee whole after factoring in the overtime pay.
However, be aware of your state’s rules in calculating an employee’s hourly wage before you make a final determination. Also, keep in mind that the hourly rate can’t go below the current minimum wage for your state or the federal level of $7.25/hour, whichever is higher.
This can be especially problematic for employees whose overtime is more seasonal. You may find that the new hourly rate reduces the employee’s pay for some periods of time, even though it comes out equally when reviewed over the full year. Employers should communicate the change to ensure the employee understands and considers the new rate as fair.
Handling Non discretionary Incentive Payments. The new rule allows for non discretionary incentive bonuses to be counted towards up to 10 percent of the employee’s pay, so long as it is paid at least quarterly. The rule also permits employers to make a “catch-up” payment following quarter-end to meet the salary threshold and maintain exemption status. What does “non discretionary” mean? Essentially, non discretionary payments are forms of compensation promised to employees based upon objective goals (i.e. commissions, production, sales & retention goals based on a fixed formula). Be cautious of stated qualifiers in your incentive payment plans such as—“employees in good standing” or “the employer retains the right”—these may prevent you from counting the payment toward the salary threshold.
Using bonuses to make up the difference in salary can be tricky. Non discretionary bonuses and incentive payments made to nonexempt employees must be included in the regular rate of pay when calculating overtime, so employers must be sure that their employees are properly classified. A mistake here could be very costly.
Scheduling. Employees who are currently exempt are probably working outside normal business hours. Maybe they take calls in the evening or handle emergencies at the workplace overnight, or maybe they just keep up with emails via their smartphone during all waking hours. This will require a shift in expectations on both the part of the employer and the employee, as any time worked by a nonexempt employee must be paid.
Timekeeping. Exempt employees often get paid without having to clock in and out or record their hours. Having to keep track of their time will require these employees to develop a new habit. Don’t get hung up on the idea that everyone must use a time clock system. The DOL allows for multiple methods of documenting and reporting time.
Fluctuating pay. Exempt employees are used to a flat paycheck, but fluctuating hours mean fluctuating pay. This is especially relevant when paying employees for vacation or sick leave as an overtime rate of 1.5 times regular rate is only paid on hours worked more than 40 per week. Consider the disincentive of taking a full week of vacation. Pay would be based on 40 hours of PTO, which may be a lower dollar amount than the employee is accustomed to.
Adding staff. Many businesses prefer to pay as little overtime as possible, so moving exempt employees to nonexempt positions may get in the way of current practice. A company may want to consider hiring additional employees to take on tasks or work shifts previously performed by exempt employees in order to minimize overtime. But be aware that increasing the workforce adds both direct and indirect costs in training new employees, paying federal and state unemployment, finding additional work space and managing additional workers.
As with everything involving human resources, communication and planning are key to making employees comfortable with changes. If you are a Mize Houser payroll client, we can generate a report of potentially affected employees to help you in your decision making process. Contact your payroll processor to obtain a copy of the report.