As you have probably heard, the Department of Labor is planning to
dramatically raise the minimum salary requirement for employees to
qualify as exempt under the “White Collar Exemptions.” As we learned on
May 18, 2016, the new minimum is $47,476, which could impact nearly five
Update: On November 22, a U.S. District ruled in
favor of an injunction blocking the final overtime rules from being
implemented on December 1, 2016. At this time, we are awaiting more
information on updates to the rule and the final implementation date.
If you have implemented changes already, we recommend businesses not
change any plans, pay structures, or policies that have been
What steps do you need to take to comply?
Step 1: Identify Which Employees Could Be Affected
Determine which, if any, employees are currently classified as exempt,
but are making less than $47,476 per year. The proposed rules indicate
that the salary minimum may increase each year with the cost of living,
or some other indicator, so keep in mind that the exemption status of
employees currently being paid just over the minimum could be in
jeopardy just one year after the rules become effective.
Step 2: Figure Out How Many Hours They Currently Work Each
In order to make the best decision about how to deal with the employees
who will either need to be reclassified or given a pay increase, you
need to know how many hours they are actually putting in. If you simply
calculate each employee’s hourly rate assuming they work 40 hours per
week, you may get some undesirable results. For example, let’s look at
three employees currently classified as exempt, each of whom makes
$48,000 a year. If you divide $48,000 by 2080 hours (the number of hours
worked in 52 40-hour weeks) you get about $23.08 per hour. If you
operate on the assumption that each of those employees is working about
40 hours—because you haven’t checked—you may be in for some surprises.
Chandler, a 9 to 5 administrative employee, is currently putting in 40
hours a week. He’ll still make $48,000 – perfect!
Joey, a manager, is currently putting in 60 hours a week. If we start
paying him for 20 hours a week of overtime, he’ll make $72,000 and get a
massive pay increase.
Phoebe, an efficient executive who always meets her deadlines, is
putting in 30 hours a week. If we pay her by the hour, she’ll make
$36,000 and see a significant pay decrease.
As you can see, a one-size-fits-all approach may not be ideal. So, in
order to get the kind of information we need, we’ll have to ask our
employees to do something new: track their time. How you go about
this is entirely up to you. You could ask exempt employees to use the
same timekeeping system as non-exempt employees, have them track their
time with an app for their computer or phone, or do something as casual
as have them track time on sticky notes and let you know each Friday.
You can expect a certain amount of pushback. When asking exempt
employees to do this, be sure to communicate 1) that it’s about
compliance with new laws rather than about micromanagement and 2) that
you won’t be using the information to make any deductions from their
Step 3: Do the Math
Now you’re ready to crunch the numbers and do a cost-benefit analysis of
the impact on morale. Let’s return to our hypothetical employees from
Chandler: It would cost an extra $2,440 per year to keep Chandler as
exempt. The benefit would be that you don’t have to track his hours and
deal with the associated costs, and if the status of being exempt is
important to him, he’ll get to maintain it. Also consider how much time
will be lost during his day to track his time, as well as the cost to
the HR and Payroll departments to carefully track his hours throughout
the year. However, if those overhead costs to the company and the cost
to his morale are low, it probably makes sense to just pay him
Giving Joey the $2,440 raise has the same benefits as it would for
Chandler; there wouldn’t be any wasted overhead in tracking hours, and
he could maintain any feelings of importance related to being an exempt
employee. However—we’ve seen the math—if you wanted to go ahead and pay
Joey on an hourly basis, you’d need to pay him less than $23.08/hour
unless you want to significantly increase his income. If you wanted to
pay him the same amount annually, and for him to continue working the
same number of hours, here’s the equation you would use (it’s called a
Total earnings ÷ [2,080 + (annual overtime hours x 1.5)] = hourly rate
$48,000 ÷ [2,080 + (1,040 x 1.5)] = $13.19/hour
To pay Joey the same amount on an annual basis, you’d need to make his
hourly rate $13.19. This number, being much lower than $23.08, and
perhaps a far cry from the market value for the type of manager he is,
may make Joey feel devalued. It would also require that he continue at
his 60 hour per week pace at all times in order to maintain his previous
level of income. This is ultimately a business decision, but morale will
probably be a bigger part of your cost-benefit analysis when deciding
what to do with Joey.
Phoebe: The advantages of giving Phoebe the raise are the same as with
Chandler and Joey – easier administration. But if you decide to pay her
hourly you’ll want to divide her current salary by her actual number of
hours worked per year to get her new hourly rate (easier math here!). As
an executive-level employee, her new rate of $30.77 per hour is likely
commensurate with her level of responsibility and contribution to the
company. However, if you had been under the impression that Phoebe was
working closer to a 40-hour week, and that her services are not worth
almost $31 per hour, you may be facing a harder conversation.
Step 4: Look at the Big Picture
Once you have your numbers in hand and have considered the feelings of
employees affected by this change, take a moment (or a day, or week) to
consider the employees who are technically unaffected by the new rules.
This may be the hardest issue to tackle. Consider: if Chandler, who
works 40 hours a week, receives a $3,000 raise, will his manager who
frequently works overtime and makes $54,000 also receive a raise? If you
convert Joey to an hourly wage and he compares his $13.19 per hour with
a non-manager making $15, does that send the non-manager a message that
moving up the hierarchy is a bad idea?
Whatever decisions you make, try to ensure that they are as impartial as
possible and that you’re documenting the business-related reasons for
How Paycor Can Help
Paycor has the resources to help you truly understand how new
regulations could affect your business and your employees.
Assess your company’s readiness for these changes by downloading our 7
to compliance, or turn to our Employer Conversation
Guide as you
prepare for challenging discussions with affected employees. Reach out
to learn more.
This content is for educational purposes only and is not intended to
serve as legal advice.
Source: HR Support Center
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