FLSA Overtime Rule Reclassification Cost Benefit Analysis | OnePoint HCM

Posted by bop-admin on May 25, 2016 10:54:52 PM

Final overtime rule raises the minimum salary requirements to $47,476

Decide who to keep exempt and who should be reclassified

The Department of Labor (DOL) has issued the final overtime rules that raise the minimum salary requirement for employees to qualify as exempt under the “White Collar Exemptions.” The new salary threshold has been set at $47,476 which is less that some estimates, but still expected to affect millions of workers exempt status.

The DOL notes that the final rule, “updates the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-protected employees, thus making the EAP (Executive, Administrative and Professional) exemption easier for employers and workers to understand and apply. Without intervening action by their employers, it extends the right to overtime pay to an estimated 4.2 million workers who are currently exempt. It also strengthens existing overtime protections for 5.7 million additional white collar salary.”

The deadline to comply with the new overtime rule is set for December 1, 2016, giving employers six months to review job descriptions and update employee status if necessary.  Of course any employer can expect a certain amount of pushback from currently exempt staff who is not used to tracking time in general or monitoring the amount of time spent on different sets of duties.  When asking exempt employees to do this, be sure to communicate (1) that it’s about compliance with new laws rather than about micromanagement and (2) that you won’t be using the information to make any deductions from their paycheck.

Performing the Cost Benefit Analysis

The first part is performing a review to determine which, if any, employees are currently classified as exempt, but are making less than $47,476 per year. The rules indicate that the salary minimum may increase each year with the cost of living, or some other indicator, so keep in mind that the exemption status of employees currently being paid just over the minimum could be in jeopardy just one year after the rules become effective.

Figure Out How Many Hours They Currently Work Each Week

In order to make the best decision about how to budget for employees who will either need to be reclassified or given a pay increase, you need to know how many hours they are actually working. With exempt employees, if you operate on the assumption that they work a standard 40 hour work week, you may be in for some surprises.

We have three examples of employees currently classified as exempt, each of whom makes $45,500 a year. If you divide $45,500 by 2080 hours (the number of hours worked in 52, 40-hour weeks) you get about $21.88 per hour. But without double checking actual hours worked for each of these employees, you may get undesirable results later. Let’s do the math:

Example 1 - Luke

Example 2 - Han

Example 3 - Leah

Luke is an administrative employee (whose primary duty does not include the “exercise of discretion and independent judgment with respect to matters of significance”) who works daily 9 to 5.  Since he is putting in 40 hours a week. He’ll still make $45,500–perfect! Han is a manager currently putting in 60 hours a week. Paying Han for 20 hours a week of overtime, he’ll make $79,632 and get a massive pay increase. Leah, an efficient executive who always meets her deadlines, is putting in 30 hours a week. If we pay her by the hour, she’ll make $34,133 and see a significant pay decrease.


These examples highlight that one-size-fits-all approach may not be ideal. In order to get the kind of information we need to make a determination by the December deadline, we’ll have to ask our exempt employees to do something new as soon as possible: track their time. How you go about this is entirely up to you. You could ask exempt employees to use the same timekeeping system as non-exempt employees, have them track their time with an app for their computer or phone, or do something as casual as have them track time on sticky notes and let you know each Friday.

As we mentioned, it can be a difficult request to ask exempt employees to do this, and you might get some pushback.  Be sure to communicate (1) that it’s about compliance with new laws rather than about micromanagement and (2) that you won’t be using the information to make any deductions from their paycheck.

Step 3: Doing the Math and Cost/Benefit

Now it’s time calculate costs to be able to run cost-benefit of maintaining current status or changing, keeping in mind potential impact to the employee morale. Let’s return to the three hypothetical employees from Step 2.

Example 1 - Luke

Example 2 - Han

Example 3 - Leah

Luke verified that he works a standard 9-5, 40 hour work week.  He makes $45,500 today, so it would cost an extra $1,976 per year to keep Luke as exempt ($47,476). The benefit of keeping Luke exempt is that he won’t have to track his hours and if the status of being exempt is important to him, he’ll get to maintain it.

A deeper cost-benefit analysis should also consider if the $1,976 is worth not having to deal with potential overtime costs, time lost during Luke’s day to track his time, as well as the cost to the HR and Payroll departments to carefully track his hours throughout the year.

But if those overhead costs to the company and the cost to Luke’s morale are low, it probably makes sense to just pay him $21.88 an hour.

Giving Han the $1,976 raise has the same benefits as it would for Luke; there wouldn’t be any wasted overhead in tracking hours, and he could maintain any feelings of importance related to being an exempt employee.

However—we’ve seen the math—if you wanted to go ahead and pay Han on an hourly basis, you’d need to pay him less than $21.88/hour unless you want to significantly increase his income. If you wanted to pay him the same amount annually, and for him to continue working the same number of hours, here’s the equation you would use (it’s called a cost-neutral rate):

Total earnings ÷ (2,080 + (annual overtime hours x 1.5)) = hourly rate

$45,500 ÷ (2,080 + (1,040 x 1.5)) = $12.50/hour

The advantages of giving Leah the raise are the same as with Luke and Han–easier administration. But if you decide to pay her an hourly wage, you’ll want to divide her current salary by her actual number of hours worked per year to get her new hourly rate (easier math here!).

As an executive-level employee, her new rate of $30.43 per hour is likely commensurate with her level of responsibility and contribution to the company.

However, if you had been under the impression that Leah was working closer to a 40-hour week, and that her services are not worth almost $31 per hour, you may be facing a harder conversation.


Step 4: Look at the Big Picture

Once you have your numbers in hand and have considered the feelings of employees affected by this change, take a moment (or a day, or week) to consider the employees who are technically unaffected by the new rules. This may be the hardest issue to tackle. Consider: if Luke, who works 40 hours a week, receives a $2,000 raise, will his manager who frequently works overtime and makes $54,000 also receive a raise? If you convert Han to an hourly wage and he compares his $12.50 per hour with a non-manager making $15, does that send the non-manager a message that moving up the hierarchy is a bad idea?

Whatever decisions you make, try to ensure that they are as impartial as possible and communication is open and timely.  The communication plan will likely need to include all employees about the reasons driving any changes and the process.  Make sure to document the business-related reasons for each change and acknowledgement from the employees.

Topics: HR Compliance, Compliance