HR Administration | 

FAQs: Reclassifying Employees to Comply with New Overtime Rule

Effective January 1, 2020, the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive overtime exemptions will increase from $455 per week to $684 per week (or from $23,660 per year to $35,568 per year).

Employers will be able to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum, as long as these forms of compensation are paid at least annually.

If your exempt employees' salaries fall below this new threshold, you will generally either have to:

  • Raise their salaries to the new requirement; or
  • Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.

Below, we answer some frequently asked questions about reclassifying exempt employees in light of the new rule.

Q: How can I determine whether it will cost me less to raise the employee's salary or reclassify the employee as non-exempt?

A: Here are some guidelines to help you with this cost analysis:

  • Get an accurate picture of the hours exempt employees typically work per week. If you underestimate their hours and reclassify them as non-exempt, your overtime costs would be more than you anticipated.
  • If you haven't already done so, conduct a time study. Ask exempt employees to start tracking their time and/or ask the employees and their supervisors how many hours they typically work per week.
  • Factor in peak periods for your business as well as all "hours worked" under the FLSA (see the next QA for more information on hours worked).
  • Use our calculator to estimate the costs of raising salaries versus reclassifying employees.

Q: What is meant by "hours worked" under the FLSA?

A: Under the FLSA, hours worked includes not only productive time (time actually spent working) but also certain nonproductive time, such as rest breaks, travel time, and training time. If you reclassify employees as non-exempt, all of this time must be included when determining whether you have met the minimum wage requirements and whether overtime is due. For example, if your exempt employees do a lot of business travel, this could result in significant overtime hours (and costs) if you were to reclassify them as non-exempt.

Note: Under the FLSA, employers are permitted to pay employees a lower rate of pay for non-productive time as long as it meets or exceeds the highest applicable minimum wage (federal, state, or local). For example, if the highest applicable minimum wage is $15 in your jurisdiction, you could pay a non-exempt employee $15 for non-productive time, and more than $15 for productive time.

Q: For non-exempt employees, what is the overtime rate?

A: Under federal law, the overtime rate is 1.5 times the employee's "regular rate of pay." An employee's regular rate of pay includes their hourly rate plus the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. If you don't include these payments when determining an employee's regular rate of pay, you will likely underpay employees for overtime, which can result in back pay, fines, and other penalties.

Q: What is a nondiscretionary bonus?

A: Nondiscretionary bonuses are generally defined as those announced or promised in advance to help motivate employees to work more efficiently or to remain with the company. Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. Most bonuses are considered nondiscretionary.

By contrast, discretionary bonuses aren't announced or promised in advance. For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus. You don't have to include bona fide discretionary bonuses when determining an employee's regular rate of pay, and discretionary bonuses may not be counted toward meeting the minimum salary requirement for exemption from overtime.

Q: In a recent Tip of the Week, you mentioned a cost-neutral approach to reclassifying employees as a result of the new rule. What happens if I do this but the employee works less overtime than I anticipate, and therefore, their pay is less than when they were exempt? Would I have to provide extra pay to them so they receive the same amount as when they were exempt employees?

A: By way of background, if employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium when you reclassify them as non-exempt and set an hourly wage. To take this cost-neutral approach, you can use this simple formula:

Weekly Salary
[40 hours + (Overtime Hours Worked Per Week x 1.5)]

Here's an example:

An exempt employee's current salary is $550 per week, the employee regularly works 50 hours per week, and you want to convert this employee to an hourly employee but keep your costs the same. You would calculate the hourly wage as follows:

$550 weekly salary

= $10 hourly rate

[40 hours + (10 overtime hours x 1.5)]

This employee would be paid $10 per hour for the first 40 hours and $15 per hour ($10 x 1.5) for each hour of overtime. Remember, whatever hourly rate you decide to pay reclassified employees, it must meet or exceed the highest applicable minimum wage (federal, state, or local).

If you use this approach when converting an exempt employee's salary to an hourly wage, you wouldn't be required to pay for shortfalls that result solely from an employee working less overtime than you anticipate, unless you promised otherwise. However, a significant reduction in pay after reclassification could result in employee morale issues. Consider how you will handle these types of scenarios should they arise.

Q: If our company decides to go with option two (reclassification) for one employee, do we have to use that option for all exempt employees who earn less than the new minimum?

A: Generally, this decision should be made on a per-employee basis, meaning you can choose one option for some employees and another for other employees. However, you'll also want to take into consideration job classifications and pay equity. Consider factors such as the employee's current salary, the number of hours the employee typically works per week, and whether or not the employee travels for work. If re-classification impacts similarly situated employees differently, you'll want to make sure each employee is being paid fairly.

Q: Can I continue to pay impacted employees a salary after I reclassify them as non-exempt?

A: If you reclassify employees as non-exempt, you can still pay them a salary as long as they receive at least the minimum wage for each hour worked and overtime pay whenever they work more than 40 hours in a workweek. Remember, you will need to track their hours closely to ensure you pay overtime in accordance with the law.

Q: To limit my overtime costs, can I have a policy that prohibits employees from working overtime without prior approval?

A: You can implement a policy that prohibits employees from working overtime without prior approval, but if they do work more than 40 hours in a workweek, you must pay them overtime. If employees violate your policy, you can discipline them, but you may never withhold overtime pay.

Q: To ease administration, can I just pay overtime to non-exempt employees at a flat sum instead of calculating it each week? For example, I know that if I pay my employees a flat sum of $500 each week for overtime, this will cover any and all overtime they work in a workweek.

A: No. You must calculate and pay overtime to non-exempt employees on a per-hour basis. You may not pay employees a flat sum for all overtime worked, even if it would be greater than what is owed on a per-hour basis.

Q: Can I offer time off to employees instead of overtime? For example, can I give an employee 1.5 hours off for each overtime hour instead of extra pay?

A: This practice is commonly known as "comp time" and it is prohibited in the private sector. Non-exempt employees who work more than 40 hours in a workweek must receive overtime pay.

Q: When reclassifying an employee as non-exempt, can I transfer some of the employee's duties to a part-time employee to limit the reclassified employee's hours to 40 per week?

A: Transferring duties of a non-exempt employee to another employee continues to be one of the options employers have for reducing overtime costs. When weighing this approach, consider whether adding part-time employees or increasing the hours of existing part-time employees would subject your company to additional requirements under other laws, such as the Affordable Care Act.

Q: Many of my exempt employees haven't tracked their hours for years. Now I plan to reclassify them as non-exempt and need them to accurately track their hours. What can I do to help with the transition?

A: Here are several best practices for non-exempt employees:

  • Provide training on your timekeeping policies and on using your timekeeping system.
  • Direct them to record all of the time they work and expressly prohibit off-the clock work (however, if they do perform off-the clock work, you must pay them for this time).
  • Consider controls to prevent off-the-clock work (such as, limiting remote access to work email).
  • Inform them that they should report any errors in their time record immediately.
  • Require them to record the beginning and ending time for unpaid meal periods.
  • At the end of each payroll period, require them to confirm their hours of work.
  • Closely monitor compliance with your timekeeping rules and practices.

Conclusion:

Make sure you understand the full impact of whatever option(s) you choose to comply with the new overtime rule. Once you have a plan, decide how you will communicate the changes to your employees.

FLSA & Overtime Rule Guide

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