Will the new FLSA salary level really cost more?

There have been numerous posts on industry forums from staffing executives and owners about the new Fair Labor Standards Act (FLSA) salary levels.  The new overtime rule takes effect on December 1^st of this year (https://www.dol.gov/WHD/overtime/final2016/).  Many executives are still planning for this significant change to how exemption from overtime is effected by the new salary levels.  Many firms will need to either change employees’ status to non-exempt, which means paying overtime for hours over 40 in workweek; or, increase exempt employees to the $47,476 annually.  One post noted that that their firms’ recruiters make ~$40,000 annual in salary and are exempt from overtime pay. The post proposed changing the recruiters to salary, non-exempt with a 60-hour workweek. It asked if any other firm was taking this approach.

Let’s first clarify what this means.  Essentially the employee would be paid a salary assuming that every week the employee would work 20 overtime hours, a total of 60 hours per week.  When you do the math on this approach, the employee would make $10.99 per hour.  Breaking down the salary, it would be $22,859 in salary wages (40 regular hours) and $17,144 in overtime wages (20 overtime hours).

So first, is this approach legal under the new regulations?  And second, should you take this approach at your firm?  My answers to this are YES and NO.

Before we get into the legality of this approach, it is likely this position did not meet the exemption status in the first place.  In many cases, recruiter job duties do NOT meet the Administrative Exemption, or any other exemption from overtime.  Regardless of whether you would raise the salary to $913 per workweek, you would still be in violation of the FLSA.  Be sure you fully understand the Administrative Exemption and the requirements of 'discretion and independent judgement' before making a position exempt (https://webapps.dol.gov/elaws/whd/flsa/overtime/glossary.htm?wd=discretion_and_judgment). So, if you have to reclassify the position as non-exempt anyway, use this opportunity to blame the regulation changes to right a wrong.

Is this salary, non-exempt structure legal?

Yes, this can be legal if it is structured correctly. The first thing to check is minimum wage. An employer is still required to pay an employee minimum wage. In order to figure out if you are meeting the minimum wage requirements, you would have to do the math that I did above.  In this example, the employees wage per hour boils down to approximately $10.99.  The current minimum wage in DC is $11.50 and in Massachusetts rises to $11.00 in 2017 (from $10.00).  This hourly wage of $10.99 would not be compliant in DC and MA, but would be compliant under federal law and all other states.

We may assume by the question in the post that they do not plan on having the employee track time, i.e. punch the clock.  It is critical to know that once an employee converts to non-exempt, the Department of Labor requires certain records be maintained. This includes hours worked each day, total hours worked each week, and total overtime earnings for the workweek (https://www.dol.gov/whd/regs/compliance/whdfs21.pdf).  In addition, states may have even more requirements on recording time worked and how that is displayed on the paycheck.  You will be required to breakdown the employees’ paycheck to show the regular versus overtime hours and wages, regardless of whether the employee tracks time.  With that being said, you can auto-track assumed hours each day.  So in our example, you might assume that 12 hours are worked for five days (totaling 40 regular hours, 20 overtime hours each workweek).  You would also want to have the employee approve this time each pay period so they have the opportunity to adjust the time should they believe they worked less or more hours and were due more overtime pay.  If a dispute ensues with the Department of Labor (DOL), in the absence of employer records, the employees word and records are generally taken. Protect yourself!

Another thing to note is that it is not legal to pay a fixed sum for varying amounts of overtime.  The DOL states, “A lump sum paid for work performed during overtime hours without regard to the number of overtime hours worked does not qualify as an overtime premium even though the amount of money paid is equal to or greater than the sum owed on a per-hour basis”; and, “A fixed salary for a regular workweek longer than 40 hours does not discharge FLSA statutory obligations.”  Once again, you can’t get out of having the employee track time worked, or at least have them confirm the hours they worked by some system or process, and pay the overtime according to time worked over 40 hours in a workweek.  (https://www.dol.gov/whd/regs/compliance/whdfs23.pdf)

So in our example above, you would have to clearly state that the employee is paid a salary of $22,859 for the first 40 hours in a workweek.  Hours worked over 40 are calculated using the hourly rate of $10.99 at 1.5 times this rate.  It would NOT be recommended to simply say a salary of $40,000 for this non-exempt employee working a 60-hour workweek.  The DOL would consider this $40,000 salary for the first 40 hours, then OT would be due on top of that at a rate of $19.23 per hour, which is an OT rate of $28.85 per OT hour.  YIKES!

A better way to structure a salary, non-exempt employee is to use Section 778.114 - Fixed salary for fluctuating hours.  This is a little know section of the FLSA (https://www.dol.gov/whd/regs/compliance/WH1262.pdf). This section requires that you have a written agreement, or what they call “clear mutual understanding” for the compensation arrangement.  You can pay the employee a salary, or “fixed straight time”, assuming that hours fluctuate from week to week.  So you would pay the same salary whether the employee works 40 hours in the workweek or 35 hours or 60 hours.  However, the employee is still due overtime, BUT under this section the employee is only due at one-half time.  Yes, you read that right, one-half time, not one-and-one-half times!

Under Section 778.114, you would have the employee track their time, which as I’ve pointed out you would have to do anyway.  You would calculate the rate each workweek based on the hours worked.  So, if you agree to pay a salary of $35,000, that’s $673.07 per week.  You would divide the per week rate by the ACTUAL hours worked to get the hourly rate.  That’s $16.82 at 40 hours, $19.23 at 35 hours, and $11.22 at 60 hours.  You would owe zero OT at 40 hours, zero OT at 35 hours, and only $112.18 OT at 60 hours (which is $5.61 for 20 OT hours).

Should you take this approach at your firm?

You could pay $40,000 annually to this salary, non-exempt employee and take your chances.  Or, you could use Section 778.144.  Either way, you still have to track time, and calculate regular wages and OT wages on the paycheck for non-exempt employees, no matter how you “cut the cake”.  You still have to be mindful of actual hours worked. Educate yourself on the definition of hours worked for non-exempt employees.  It’s frightening. https://www.dol.gov/whd/regs/compliance/wh1312.pdf

For example, if a non-exempt employee checks their work email in the morning, then proceeds to drive to work, the time that employee spent checking their email is work time AS WELL AS the time they spent driving to work…because, they started their workday or “commenced his/her principal activities.”  What?? Yes!

You might as well take this opportunity to blame the DOL and make changes.  If you do not structure this salary, non-exempt arrangement correctly and are audited you will owe back pay to employees and fees to the DOL.  And, the DOL doesn’t audit just one employee, they will audit your entire organization!  Just convert these employees to hourly, non-exempt.  Determine a fair and equitable hourly wage for each non-exempt employee. Implement a time tracking system. And, most importantly, really think about the message you’re sending and the culture you’re creating.   If your employees are truly working 60 hours a week, or close to it, how long can that realistically be maintained.  According to the national averages, 77% of workers struggle with stress.  Are you able to attract and retain high performing employees when you tell them they will likely be working 60 hours a week… for $40,000 per year no less?

There are organizations that are taking this opportunity to make real changes.  Amazon is piloting a salary with a 30-hour workweek where employees are paid at 75% of the 40-hour rate.  They are hoping to attract and retain high performing employees that need to balance work and personal time.  https://www.washingtonpost.com/news/the-switch/wp/2016/08/26/amazon-is-piloting-teams-with-a-30-hour-work-week/.