Six months from now, on December 1, 2016, a new federal overtime rule goes into effect. The new overtime rule doubles the annual salary threshold that must be paid to an employee in order for the employee to qualify for an exemption from the overtime pay requirements. The current annual salary is $23,660 and the new annual salary is $47,476.
It’s likely that your organization has at least a few white collar employees who satisfy one of the duties tests for exemption and earn between the old salary level and the new salary level. In light of the new rule, employers should evaluate these job categories to determine which employees do and do not work more than 40 hours per workweek.
Ultimately, employers may determine that changes to pay or hours are not necessary because the employee will never work any overtime. If the employee’s salary will be kept the same (that is, less than $47,476 a year), the only change to be made is to re-classify the employee as non-exempt (and thus overtime eligible). In addition, employers should keep an accurate record of hours worked by such an employee.
If, after evaluation, an employer determines that there are employees likely to work more than 40 hours in a workweek, there are a few options to consider:
Raise Salaries
Employers may choose to raise the salaries of employees who meet the duties tests and who regularly work over 40 hours per workweek, particularly if their current salaries are close to the new salary level. These employees would remain exempt and no overtime would be due to the employees.
Pay a Salary plus Overtime
In lieu of raising salaries, employers may choose to continue paying employees a salary covering a fixed number of hours of work per workweek, on top of which overtime pay would be due.
One option is to pay employees a salary that covers 40 hours of work per workweek, and then pay overtime at time-and-a-half the employee’s regular rate of pay for any hours over 40 in a workweek. This might be a preferred option for employees who work 40 hours per workweek and do not frequently work overtime, or for employees who do not consistently work the same amount of overtime.
A second option is to pay employees a salary for a certain number of hours in excess of 40 hours in a workweek. By doing so, an employer would pay an employee a salary to cover all straight time hours worked, one-half the employee’s regular rate of pay for overtime hours included within the salary, and time-and-a-half the employee’s regular rate of pay for overtime hours beyond those included in the salary.
Consider an employee who earns a fixed salary of $41,600 per year for a 50-hour workweek ($800 per workweek). The salary does not include the overtime premium. Because the salary is for 50 hours per workweek, the employee’s regular rate of pay is $16 ($800/50). In a normal 50-hour workweek, the employer would pay the employee the additional half-time overtime premium for the 10 hours of overtime ($8 per hour). In that normal 50-hour workweek, then, the employee would earn $880. If the employee worked more than 50 hours in a workweek, the employer would also owe overtime compensation at time-and-a-half the employee’s regular rate (1.5 x $16 = $24/hour) for hours beyond 50 because the salary does not cover payment for those hours. Therefore, if the employee worked 52 hours in a workweek, the employee would earn $928, which is $880 plus 2 hours of overtime at a rate of $24/hour.
Another option is to pay employees a fixed salary that covers a fluctuating number of hours at straight time. This method permits employers to pay fluctuating workweek employees overtime at the one-half rate, instead of at the time-and-a-half rate. In order to do so, an employer must communicate to the employee that “the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number” and pay the employee a salary large enough to ensure that the employee always earns more than the minimum wage.
Adjust Wages
Another option is for employers to adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime so that the total amount paid to the employee remains largely the same. For example, an employee who satisfies the duties test for the administrative exemption earns a salary of $37,000 per year ($711.54 per week). If the employee regularly works 45 hours per workweek, the employer may choose to instead pay the employee a regular hourly rate of $15 and pay overtime at a rate of time-and-a-half (1.5 x $15 = $22.50) for the 5 overtime hours worked each workweek. By doing so, the employer would pay the employee $712.50 per week.
Reorganize Workloads, Adjust Schedules and Redistribute Work Hours
Last, but certainly not least, employers may consider reorganizing workloads, adjusting employee schedules, and redistributing work hours (which may or may not include hiring new employees) to reduce or eliminate overtime hours.