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FLSA Exempt Employee Minimum Salary Changes: Doing the Math

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

million employees.


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

updated.


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

Week

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.

  1. Chandler, a 9 to 5 administrative employee, is currently putting in 40

    hours a week. He’ll still make $48,000 – perfect!

  2. 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.

  3. 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

exempt

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

paycheck.

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

Step 2.

  1. 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

    $23.08/hr.

  2. 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

    cost-neutral rate):

    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.

  1. 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

each change.

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

Step

Guide

to compliance, or turn to our Employer Conversation

Guide as you

prepare for challenging discussions with affected employees. Reach out

to

us

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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