Businesses have relied upon the ability to hire employees at a guaranteed annual salary without paying attention to the number of hours worked. A recent rule change may end that practice by raising the salary threshold to exempt employees from overtime. We have spoken to many business owners that support the goals of the change, but it’s clear the rules will mean changes for all businesses.
What does the rule change mean for you?
Under the new overtime rules, employers must pay overtime to salaried employees earning less than $47,476 per year. The Department of Labor will increase the salary threshold every three years. Based on current projections, the salary threshold is expected to rise to more than $51,000 with its first update on January 1, 2020. There are no changes to the standard duties tests. Employers must comply with the changes by December 1, 2016.
Before you panic, this may not mean an increase to total wages but merely a conversion from an annual salary to an hourly rate. Simply calculate the approximate number of straight time hours and overtime hours to determine the hourly rate equivalent of the employee’s annual salary. For example, the hourly rate conversion for an employee, who works on average 60 hours a week and earns a salary of $32,760 per year is $9/hr (40 hours straight time, 20 hours overtime). You can find a convenient calculator here:
In calculating the conversions, keep in mind that the hourly rate equivalent cannot fall below the federal and state minimum wage. For example, if managers or other salaried employees are working on average 80 hours a week, their annual pay will total $37,700 annually if minimum wage is $7.25 in your state, or $41,600 if minimum wage is $8/hr.
The new rules will also affect bonuses. Guidance has not yet been issued regarding whether or not bonus payments may be calculated into the exempt status annual salary minimums. However, even under the old rule, bonus payments for non-exempt employees must be added into the calculation of the hourly rate for purposes of calculating overtime payments. This means you may have to eliminate any bonuses for salaried employees who fall below the new minimum annual salary or face additional tracking.
That’s not all. For employees earning a salary of less than $47,476, you will also have to comply with any state meal breaks or rest period requirements.
The impact on employees
Although the rules are intended to improve the ratio of working hours to wages for employees, there may be a number of other impacts employees may face:
- Hourly employees shifts may be cut to reduce overtime hours.
- Hourly employees may pick up shifts or second jobs from other employers to cover the loss of wages.
- Exempt employees may have added job duties as tasks are transferred from hourly employees to exempt employees in an effort to reduce overtime.
- Employees who have been promoted to salaried jobs may feel demoralized by the change in status and a feeling of demotion.
How to prepare
For businesses, an increase to wages is not an option. If you are in this boat, now is the time to make changes in your business. Consider the following:
- Leverage technology to increase productivity. Technology options have never been cheaper or more effective. Whether the task is tracking inventory, managing employee schedules, running payroll, or calculating profitability, there is a raft of new options that can save hours of management time. Many vendors may even provide solutions for free.
- Focus on reducing employee turnover. Turnover is a part of any industry but it is time intensive. Implement an HR action plan to reduce turnover, including increased rewards and recognition, effective communication, and development opportunities. Hire employees who live closer to your location. Conduct exit interviews to figure out what went wrong. Then save time on hiring: consider outsourcing recruitment or resume screening.
- Evaluate responsibilities in your shop. Which job duties take too long for the value they produce? Which job duties can be offloaded to an exempt employee or a lower-paid employee? What tasks can be eliminated completely using technology or a process change? Use the rule change as a time to re-evaluate and redistribute responsibilities.
- Cross-train your staff. Develop a training plan to cross-train staff in essential duties for hard to fill positions. Having a well-trained staff can provide additional flexibility in assigning hours to avoid overtime.
Don’t delay. Conduct an audit immediately to determine if the changes will impact your organization and begin preparing your business. And don’t forget to prepare your team. Ask for their help in preparing, and over-communicate any changes you make. You will be facing the new rules together on December 1.