FLSA Exempt Employee Minimum Salary Changes: Doing the Math
April 14, 2016
Batten Down the Hatches!
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.” It’s possible this new minimum will be as high as $50,440, which could impact nearly five million employees. The threshold could certainly be lower when announced, but for the sake of this article—and for being over-prepared, rather than under—we’ll assume the $50,440 number will hold.
These new rules could be announced as early as this month. It’s also possible that, if the final rule is not announced in the next couple of months, Congress could take action that would table the rule change indefinitely, and all of the concern over this issue will be for naught. But assuming the new rules do take effect this year, we want you to be prepared. Once the changes are published, employers will likely have only 60 days to comply. So what steps should you be taking now?
Step 1: Identify Which Employees Could be Affected
Determine which, if any, employees are currently classified as exempt, but are making less than $50,440 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.
- 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 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.
- 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.
- Joey: 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
- 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.
There’s obviously a lot to consider here. Over the next few months, we’ll be providing a number of resources through the HR Support Center to help you through the process. Check out the Training section for a 2-Minute HR on the definition and implications of designating employees as “salaried non-exempt,” and see the guides section for more details related to these changes.