The Department of Labor roughly doubled the overtime threshold this week, changing the FLSA overtime exemption rules. The rule raises the salaried threshold from $455 per week to $913 per week. This means that anyone earning under $47,476 per year will be eligible for overtime. The rule gives employers until December 1, 2016 to comply. The salary will be updated every three years.
The change to the salaried threshold will impact some five million workers, which touches nearly every business in the country.
Employers must decide whether to switch employees over to hourly status or whether to offer raises to their salaried employees
They must weigh the cost and repercussions of doing either. Business owners need to be ready and decide what course of action to take leading up to the date at which businesses must be in compliance.
Restructuring the Workplace
The DOL is estimating that the total cost to employers to give raises to the 4.6 million employees likely to be affected by this change could reach as much as $255.3 million per year. This figure assumes that employers do not adjust their employees’ exempt status or wages. This, of course, isn’t going to happen. Employers will definitely redefine their employees’ statuses and wages so that employees are paid a wage that makes sense for their position and that is financially feasible for their business.
It is likely that most salaried employees around the country whose salaries are on the low end of the current salaried threshold of $23,660 per year will not be given a hefty pay raise to meet the new threshold requirements but will be reclassified as hourly and a new wage will be worked out.
By the effective date, employers will need to identify the employees that should be reclassified, figure out their new hourly wages, and make any other changes that will mitigate the financial blow.
Identify employees who should be reclassified from salaried to hourly
- Employees currently classified as salaried that make less than $913 per month but don’t typically work over 40 hours per week should be converted to hourly.
- For employees who work more than 40 hours per week, figure out how many hours of overtime the employee would make per month if they were switched over to hourly. If their total straight hours, plus overtime comes to less than $913 per month, switch them to hourly.
- Review classification qualifications of your exempt employees and reclassify any employees who may have been misclassified as salaried in the first place. Typically, reclassifications are a red flag to the DOL but since they will become common after the ruling, now is a great time to make changes without being noticed.
Create new hourly rates
When switching employees from salaried to hourly, you’ll need to figure out what to pay them. The employee’s hourly pay rate can be lowered to “match” their old weekly rate as long as they do not drop down below the federal and state minimum wage.
If lowering employees’ hourly rates to compensate for the overtime they’ll now be getting, employees may feel they are getting a demotion. Tread gingerly in this area.
Steps to figure out new hourly rates
- Figure out how many hours the employee works over 40 in a week on average
- Multiply that number by 1.5
- Add 40
- Divide the old weekly salary by that number to get the hourly rate
So for example, if an employee made $455 per week and typically worked 50 hours a week, the process would be as follows:
- Employee works 50 hours per week
- 10 overtime hours
- overtime hours multiplied by 1.5=15
- $455/55=$8.27 per hour
So in this example, we would change the employee’s hourly rate to $8.27 so that their weekly paycheck would match what it was previously. Of course, you’ll have to check your state and city’s minimum wage laws to make sure that the new rate isn’t too low.
This process probably wouldn’t work well for employees who only work overtime occasionally. If their weekly paycheck ends up being less than their old salary, they probably won’t be happy even on the occasions when their paychecks do contain some time and a half. In this case, other measures might need to be taken to cut costs.
Reduce employee benefits
Businesses may have to reduce employee time-off benefits, 401k benefits, or bonuses in order to deal with the changes in wage payments. It might not make sense for some businesses to hire part timers and to lower hourly rates significantly in order to mitigate the effects of having to pay overtime. In these cases, reducing benefits is one way in which employers can save some money.
It’s cheaper to have two employees that never work overtime than it is to have one employee that works 40 hours a week plus some overtime hours. Employers can keep their full time employees and hire part-timers to work the excess. The cost of this will likely still be more than an employer used to pay for their one salaried employee but it is more cost effective than paying overtime or raising wages to meet the new minimums for salaried employees.
Train Employees On Rules for Hourly Workers
A lot of employees that have been salaried for many years, to decades. These employees will be oblivious to the differing rules between types of workers. Training is important because staying compliant with the FLSA will help your company avoid overtime lawsuits. Make sure hourly employees are aware of these rules:
- Hourly employees must clock in and out from work. Time tracking is required for hourly employees.
- Hourly employees must be on the clock at all times while working, even while working at home and at night.
- Hourly employees must be paid for travel time, waiting time, and on-call time.
- Inform hourly employees about the company’s overtime policy.
Implement a Time Tracking System
Since all hourly employees must track their time and employers must keep time keeping records for three years, employers will have to decide on how they want to have their employees track their time. They can use the old fashioned method of writing it all down on paper but that leaves a lot of room for error, rounding, and time padding.
Keeping the timesheets on Excel spreadsheets eliminates some of the error but still gives employees the opportunity to pad their time in their favor.
The best option these days is to track time online. Timesheets.com tracks overtime accurately so that businesses can comply with the DOL’s new requirements. Employees log in online or from their phones in the field. Employers can setup location restrictions and even track bonuses and time off.