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So the Final Wage and Hour Regulations Were Released. Now What Do We Do?

On November 30, 2016, the minimum salary requirement to qualify as an exempt employee will be $455 per week. On December 1, 2016, the very next day, the minimum salary thresholds will more than double to $913 per week.

We have more than six months to get this is order. At least this is better than the 60 days that was projected.

Whew!! Take a sigh of relief.

That’s all the time you get – time to get to work.

A lot more to consider than just changing pay practices

This change is more complicated than the pundits have been stating. Here are a few things to consider when implementing the necessary changes.

Calculators have been developed to easily convert salaries to hourly wages based on the number of hours a current exempt employee works.

Unless you know the ramifications of making such changes, my recommendation is to avoid those calculators altogether. As an example, I was facilitating a webinar recently in which I was asked to comment on an exempt employee currently making $40,000 a year and averaging 50 hours a week. The plan was to convert the employee to $14 per hour or a base pay of $29,140 and pay overtime at a rate of $21/hour. According to the questioner, by adding the overtime pay of $10,920 ($21/hr. x 10 hours per week x 52 weeks) to the base pay of $29,140 for a total comp of $40,060, the employee would not lose pay and the company would not pay more. Besides the fact that no one works 5 days a week 52 weeks out of the year, the thing this questioner forgot to consider is how much do you pay the employee when he takes a week of vacation - the base pay of $560 ($14/ hr. x 40 hours) or $769 – (the weekly pay for someone making $40,000 per year)? Are holidays or paid time off counted as time worked for employees converted from salary to hourly? If so, then you may have two different overtime policies for different classes of non-exempt employees. This is not illegal, but could cause some morale problems.

Have you thought about compression problems where subordinates earning overtime end up making the same or more than their boss? This will definitely have huge potential morale issues.

Are your benefits such as PTO, life insurance, disability the same for exempt and non-exempt? If so, will the employee changing to non-exempt have benefits taken away?

Speaking of benefits, will your company have to reduce benefits or the contribution the company makes toward benefits to pay for the higher cost of labor?

When calculating the cost differences, do you include additional costs such as FICA, workers comp, disability and other payments based on earnings of employees?

Another questioner said her company has a hiring freeze. The only way for this company to maintain labor costs is to hire additional people. However, the CFO and CEO are steadfastly sticking to the hiring freeze. I told her money talks and you have to show how it would cost more under the new regulations. If the CEO and CFO stick to the hiring freeze, she has done all she can.

And we can now include bonuses and commission toward total compensation

The good news is the DOL is allowing for payments for non-discretionary bonuses to be included in the total compensation of exempt employees with a couple of provisions. Just so you know, a non-discretionary bonus is one that is based on a formula such as a percentage of sales or revenue, otherwise known as commission. Other formula driven incentive payments can be based on productivity, cutting costs or profitability.

The provisions of these incentive payments under the new regulations are:

  1. They are paid on a minimum of a quarterly basis and

  2. The amount of payment of the incentive brings the minimum compensation level to $913 per week or $47,476 per year.

  3. The incentive payment cannot be more than 10% of the standard salary level

As an example, let’s say you own a CPA firm and all of your accounting or tax professionals are required to bring in additional business. These employees are given a bonus on a quarterly basis based on the profitability of the new clients they bring into the firm. These employees all qualify for a professional exemption under the duties test, but are paid a base salary of $800 a week or $113 a week less than the salary threshold.

You have two options under this scenario to pay out the bonuses to maintain the exempt status of these employees.

  1. Since you cannot have a bonus that is more than 10% of the employee’s standard salary level, you have to increase the salary to no less than $822 per week or $91 (10%) less than the standard salary level of $913 per week. Since they are paid the bonus on a quarterly basis and there are 13 weeks in the quarter, know that you will have to pay a minimum of $91 x 13 weeks or $1,183 a quarter to each employee to maintain their exempt status.

This can be a bit risky if the employees do not make their numbers. If you do not pay the employees at least $1,183 at the end of the quarter, they could lose their exemption and you would have to go back and pay them on an hourly basis including any overtime they worked over the past three months.If the last three months was tax season – hmmm - I think you understand the risks.

  1. Another way to pay the bonus is to pay them $913 per week with $113 being a draw against future bonus payment. In this scenario, you will have paid an extra $1,469 over a three month period. This amount will then be subtracted from the total bonus payment. If the employee goes in the hole because they have not made their numbers to qualify for a $1,469 bonus, you can carry this negative number forward as long as they make the minimum salary mandated by the Department of Labor. This type of payment arrangement has always been permissible. The shortage in sales by individual employee will be handled on an individual basis. However, the exempt status will not be jeopardized because you are meeting the minimum salary level test. Another advantage to this arrangement is the firm will not be liable for a large lump sum payment at the end of each quarter. It’s something to consider.

Now, let’s look at bonus payment to non-exempt employees. If you change the status of current bonus eligible exempt employees to non-exempt of December 1, care must be taken in the payment of the bonus. If the bonus had been a non-discretionary formula based program, then the amount of the bonus payment must be rolled back into the hourly rate of the employee based on the number of hours the employee worked during the time frame in which the bonus was calculated.

Let’s say we have an employee making $20 per hour who was previously exempt and bonus eligible. The bonus was paid monthly and based on the profits for the month. The employee worked 180 hours last month with 160 regular pay and 20 hours of overtime. The bonus payout is $1,800. This amount has to be rolled back into the wages for the month giving the employee an additional $10 per hour ($1,800/180 hours = $10 per hour). Since the rate is now $30/hour and the overtime rate is $45/hour instead of $30/hour, then the employee is due back overtime of $300 ($15/hour x 20 hours of overtime).

This can get a bit complicated and administratively burdensome. However, it may also be a way to give incentives to your employees to work in a more productive way.

If you have a discretionary bonus that is not formula based, then the amount of the bonus does not have to go back into the wages of non-exempt employees. A discretionary bonus is defined as a bonus given to employees based on the decision of the boss – period. Oh, and please do not try to call a formula based bonus discretionary. It will catch up to you.

There is quite a bit of thought and analysis that must go into any change process. This change is a bit cumbersome as it is difficult to wrap your arms around consequences of the change. The important thing is to stay in compliance while taking care of business costs while keeping morale of your employees at a high level.

There is no cookie cutter approach to implementing the necessary changes to be in compliance with the new regulations. Every organization is unique with unique circumstances. And the changes will have different consequences for different employees. Making changes to the pay and pay practices are bound to cause employee relations issues. How will you minimize these problems?

There is a lot more to think about when implementing the necessary changes than converting salaries to hourly rates.

Now get back to work.

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