The U.S. Department of Labor recently decided to more than double the minimum weekly salary threshold under which salaried workers are eligible for overtime pay when they work more than 40 hours in a week. The change will take effect on Dec. 1 of this year, so companies should start preparing now.

Andrew Volin

Andrew Volin

That threshold will rise to $913 per week, or about $47,500 annually. The current threshold is $455 per week, or about $24,000 per year.

The change may lead to a further increase in wage and hour lawsuits, which have already risen dramatically in recent years. They are often brought by groups of employees rather than individuals. Double damages and attorney’s fees are available for claims under the Fair Labor Standards Act (FLSA), which provides for the overtime exemption, and defense costs are significant as well. Often, these costs exceed the amount of wages in dispute.

What Workers Are Affected?

The first thing employers should do is determine what workers are affected by the new regulation. This group primarily includes those who perform exempt duties — i.e., executive, administrative, and professional employees — and currently earn between the old minimum and the new minimum.

The new regulations did not change the duties requirements for the exemptions from the FLSA’s overtime-pay provisions. Briefly stated, “executives” must be in charge of part of a business and supervise at least two full-time workers. “Administrative” workers perform duties related to the management or general business operations using discretion and independent judgment. “Professionals” are divided into either learned (highly educated) or creative (artistic) sub-groups.

In addition, there is a second set of “highly compensated employee” exemptions for white-collar workers who earn at least $100,000 annually. These are employees who perform duties that may not strictly meet all of the requirements for an executive, administrative, or professional exemption, but are so close that the employer worries that it may lose a dispute, if one came to pass.

The new regulations increase that annual requirement for such workers to more than $134,000.

Employers must also consider, however, workers who earn slightly more than the new minimum. There are several reasons for this. One is the ripple effect from compensation changes. If one worker’s compensation is increased because of these new regulations, the employer may also want to adjust the compensation of people earning slightly more.

Also, the new regulations provide for automatic increases in the earnings threshold every three years. The increases will be based on statistics on compensation for salaried workers. For example, the minimum salary will be based on the 40th percentile in the lowest-wage region in the United States. The annual earning threshold for highly compensated employees will be based on the 90th percentile nationally.

Planning must take the future changes into account as well. Companies may want to switch their normal annual compensation changes to coincide with the Dec. 1 dates of the periodic automatic increases in the exemption threshold.

How Should Compensation Be Adjusted?

Companies must decide how to adjust compensation for the affected workers. Of course, total compensation can include a discussion of benefits, but just in terms of pay, employers may have at least five options for most white-collar workers. In summary, they are:

  1. Increase the salary level to maintain the exemption. For most companies, only a lucky few should expect this outright raise.
  2. Convert the salaried worker to an hourly worker, at a rate determined by dividing the current salary by 40 hours. If these employees work overtime, their overall compensation will rise. Accurate records of time worked are necessary to determine total compensation, for this option as well as the remaining ones.
  3. Convert the worker to hourly, at a rate determined by dividing the current salary by total hours worked. This is more complex, but on the plus side it might result in no net change in compensation. For example, say Andy has been working 50 hours per week and paid $40,000 a year. Do the math: The hourly rate works out to $14.54, so for 40 hours at straight time, Andy gets $582 per week. The 10 hours of overtime, at time-and-a-half pay, brings him $218, for a weekly total of $800. Fifty of those weeks per year equal $40,000.
  4. Convert the worker from salaried exempt to salaried non-exempt. Companies will pay overtime after 40 hours but will have to pay for 40 hours even for weeks when the worker puts in less than 40 hours. This option would be useful for workers who have a consistent number of overtime hours each week.
  5. For some workers, consider whether to use a “fluctuating work week” salary. In this situation, the weekly salary is for all hours worked, including overtime hours, except that a worker receives an extra half-hour’s worth of pay — rather than time-and-a-half — for each hour worked over 40.

One new aspect of compensation involves non-discretionary bonuses and commissions. The regulations permit employers to count these toward up to 10% of the new minimum salary amount. However, there are special rules about this as well.

What Risks Are Involved?

As suggested above, companies must accurately record all time worked by workers who are moving from exempt to non-exempt. This requires a system that includes developing and training all hourly workers on time tracking, including work that might be performed outside normal business hours and off premises. For example, responding to email and phone calls or messages counts as time worked under the FLSA. In some situations, being on call, or traveling, also counts as time worked.

In addition to having robust tracking systems, companies should implement measures by which both workers and the company can verify hours worked. This is needed to minimize disputes. An internal complaint mechanism is also necessary. A model can be the current requirements for complaint mechanisms under a variety of employment laws, such as harassment.

Also, management should expect that these new requirements, and the changes that will be necessary, will contribute to discussion among workers about the changes and how the changes impact them. Federal and state laws permit employees to discuss terms and conditions of employment, including compensation.

Therefore, communication strategies must be considered to minimize morale problems (or worse) arising as a result of, for example, workers being moved from salaried to hourly positions. Many people attach great importance to their status as salaried exempt workers.

In addition, depending on the new hourly approach used, formerly exempt workers who worked long hours (for example, 60 hours a week) may be quite surprised to learn their new hourly rate is lower than they expected.

Also, as workers compare notes with each other about their old and new compensation, there is a risk that people in protected classes (race, color, religion, national origin, gender, age, disability, etc.) may conclude that their pay is unfair or discriminatory.

These changes therefore present management an opportunity to review all their company’s payroll practices to minimize existing risk as well as future risk. Now is the time to plan for these changes.

Andrew Volin is a partner at the law firm Sherman & Howard. He advises companies in disputes involving employment discrimination, wrongful discharge, and wage and hour law.

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21 responses to “New Overtime Pay Rules: How to Adjust”

  1. I have a question regarding this.

    Can I write a contract that guarantees the employee a certain number of hours a week even if they don’t work the full amount of hours that we write the contract for?

    For example can I guarantee that the employee will get paid for the regular 40 hours, plus an additional 10 hours of overtime a week?

    If so then my manager who makes $36,400 will change to a $10.00 an hour employee with a guaranteed 10 hours of overtime a week and will make the $36,400 a year.

    As I never have had an employee work more than eight hours of overtime in any one week I will be paying them the equivalent salary amount with two hours of buffer and I will then implement a policy that will prohibit any manager from going over 10 hours of overtimes without written permission upon penalty of being fired.

    I will be effectively paying the manager the current salary without it being a salary.

    Comments?

    • Steve – I do not think this works. This is the “all hours worked” option mentioned above. You must keep track of hours for all non-exempts. Using the “all hours worked” method, you’ll have to pay 1/2 time for any OT. Think of it this way, if you are paying the same amount even when the employee only gets 5 hrs of OT, you cannot just “give” them 5 more hours. If you are paying the same amount regardless if they work 40, 42, 45, or 50 then you are using the all hours worked method and are required to pay 1/2 time for the OT hours

  2. Question
    My employer wants to take our wages and divide them into 48hours a week. But our stubs say 40 a week. We are suppose to work 45-48 but regardless of what we work our stubs still say 40. So can they didvide our salary by the 48?

    • My current job did this to me too. My pay stubs always say a flat 40 they only say we should work between 40 and 45 but yet they divided my current salary by 48.3 hrs to come up with my hourly pay and they also didn’t give us the 2 percent annual increase when they did this which we are supposed to do. Curious if that’s legal or not?

  3. I’m a salaried employee I do not have 2 people I supervise but my title is Senior Specialist my salary is 41,000 per year I get paid twice a month no matter how many hours I work in between the 2 weeks with no overtime pay. Do I fall in this category to be changed to an hourly salaried employee and should expect compensation for a pay increase

    • You can be an administrative employee without supervising others if you run a department and exercise significant discretion. Your job title is not determinative. It’s the duties they look at. To. E exempt though, you must meet the duties test and the salary test. If you are paid under $47000 you will fail the salary test and must be paid as an hourly employee and will be entitled to overtime pay.

  4. my question is. if your new pay is lower than what you were making on salary. is that legal. paid vacation does not count overtime…. also. with new change. company kept a weeks pay.

    • Of course your employer can lower your pay, so long as you at least make minimum wage. Many employees will earn less with this Obama law, and the sheeple didn’t see it coming. Oh, you may have more free time though, but not always more $$.

  5. I’m a salaried employee I do not have 2 employee to manage I work alone for almost a year now sometimes have to work six days a week I make 40,000 do I fall in this category.

    • I’m also curious the answer to this.
      For some jobs where you’re “on-call” does that technically mean you’re working those hours or just you start and stop the clock as you work.
      Since technically you have to give up your life no drinking or doing cocaine during those hours…..

  6. Excellent recap of this new and impending regulation. There are several bills in Congress and a lawsuit by a group of States attempting to slow or delay the December 1 implementation date but they are not likely to be passed in time. We tried to stop this but the ‘train kept a rollin” as the largest increase in history was initiated by the DOL without any economic analysis or oversight and despite more than 300,000 letters of comment. It is costly and will increase compliance costs for employers. We at the Maryland Association of CPAs tried several forms of advocacy, including in-person testimony to ask for adjustments and a longer timeframe for implementation but to no avail.

  7. My employer is stating they have until the end of the year to change my pay. I avg 60 hours a week at 32,000 a year. It started as about 45-50…hours increased over time. I’m tired and have been waiting on my employers to make a decision they decided to divide my salary by 50 hour work week and switch me back to salary. with that said they dont want to over due my overtime so i will only work 45 hours a week again. It does take away my vacation time but its ok i’m so tired the extra 15 hours at home with my kids is worth it now. Do they really have until jan? or does my pay come into effect dec 1 and no later?

    • Your new hourly rate can be determined any way your employer wants in most states, as long as you make minimum wage or more. It will be up to you to take it or leave it.

  8. I am currently paid once per month, my yearly salary divided by 12. Is it required that my employer move me to a weekly check? I understand the yearly compensation would change, however my personal budget would need to be adjusted.

  9. I absolutely hate this. I specifically went to work for a company that didn’t have the hourly mentality only to have my government force me in to it. Now my flexibility, my ability to outshine those that are just there for a paycheck is gone. Days when I was hammering it an getting things done are now reduced to minutes ticking by on the clock. I am so stressed out. I agreed to get a job done for a certain amount of money per year. And as long as the coverage was there I could work at my own pace. Now I have to stuff everything into a 40 hr work week and am constantly nagged as about overtime. When I try to work off the clock, they nag me then as well. The stress it is causing makes me want to go back to driving truck. This is not a structure made for an independent capitalist spirit, but for sheep.

  10. I am a retail assistant department manager. My company changed my pay from salaried to hourly. Company requires I work 45 hrs a week, 5 of that is at OT rate. Now when I take vacation of 40 hours I lose money. I feel if I’m required to work 45 a week and I’ve earned 3 weeks vacation, then my vacation should pay my required work week of 45 hours!!! I lose money taking my earned vacation time!! Please advise!

  11. My salary is based on 40 hours a week I’m working 60+ hours a week is this legal??? The company I work for does not track our hours in anyway

  12. I am currently only making $41,000/year and frequently work over 40 hours a week. I complete my timesheet each week and submit on Friday afternoons. However, I am not authorized to put more than 40 hours down for week at any given time. So any overtime I work is not noticed and I am not being compensated.

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