With the changes in the overtime rules that have been instituted by the U.S. Department of Labor effective December 1, 2016 companies are scrambling to make changes to employees currently classified as exempt that will be changed to nonexempt. One of the ways that many companies are handling this is to change everyone to hourly, non-exempt. They think this is the easiest way to handle the change and many lawyers may agree with you. However, it is not necessary to change these employees to hourly positions and cause other problems. You can have salaried nonexempt employees.
Two methods of payment
There are actually two methods of paying salaried nonexempt employees. The first of these is the preferred method. You have to have an agreement with the employee that their salary covers a set number of hours per week in exchange for their salary. You may think this has to be 40 hours, but it does not. It can be for whatever you and the employee agree upon. “Wait” you say, “I thought I had to pay overtime for all hours worked over 40?” You are correct, but for the hours agreed upon you only have to pay half-time because the salary covers the full-time involved with overtime. Let me give an example:
Assume Jim and his employer agree to a weekly salary of $800 ($41,600) in exchange for a 45-hour workweek. In a regular week Jim works 45 hours. Jim’s overtime rate is $800 / 45 = $17.78. Because he has already been paid the straight time as part of his salary he is only owed half-time for the 5 hours over 40. This means in that week he would receive $8.89 x 5 = $44.45 per week in overtime. For a full year this would mean just an additional $2,311.40 in extra pay for a total compensation of $43,911.40, well below the $47,476 required to be exempt.
Let’s assume in a given week, Jim works 50 hours. He is owed overtime pay. His regular rate is once again calculated by dividing his salary (i.e., $800) by the number of hours it is meant to cover (i.e., 45)—thus, the regular rate is $17.78. Jim has worked 10 overtime hours, but, given that his salary is intended to cover a 45-hour week, he’s already been paid straight-time pay for the first 5 hours. For those hours, he need only be paid at half-time, as stated above, which is $8.89. For hours beyond that, he has not received straight-time pay or overtime, so he must be paid at the time-and-a-half rate, which is $26.67 (i.e., $17.78 regular rate x 1.5). Jim is entitled to $177.80 (i.e., ($8.89 half-time rate x 5 overtime hours covered by salary) + ($26.67 time-and-a-half rate x 5 overtime hours not covered by salary)), in addition to his salary. For this week his paycheck would be $977.80.
I hope you get the idea. It does require that you pay the salary without hourly reductions each week, but you are already used to doing that. You can find out more by reading here.
The second method is one called fluctuating work week. You can find information on that method here. It is increasingly viewed in a negative light and many states have made it illegal to use this method. I would suggest you don’t use this method.
Live Compliance Webcast New FLSA Overtime Rules: How to Develop an Effective Communication Strategy for Your Employees
On September 13 at 2 p.m. EDT I am presenting a webinar sponsored by Ultimate Software. The title is New FLSA Overtime Rules: How to Develop an Effective Communication Strategy for Your Employees. You can register for it here. Join me as I discuss many of the issues that are involved with making this change and how to communicate them to managers and employees.