Determining a new hourly wage. It’s not as simple as
dividing an employee’s annual salary by 2,080 hours (40 hours
x 52 weeks). Exempt employees probably work more than
40 hours per week on the average, so those hours need to be
taken into account using the overtime rate of 1.5 times the
hourly rate. For example, if an employee normally works 45
hours per week and you anticipate that will continue, then set
the new hourly rate at a level that makes the employee whole
after factoring in the overtime pay.
However, be aware of your state’s rules in calculating an
employee’s hourly wage before you make a final determination. Also, keep in mind that the hourly rate can’t go below
the current minimum wage for your state or the federal level of
$7.25 per hour, whichever is higher.
This can be especially problematic for employees whose
overtime is more seasonal. You may find that the new hourly
rate reduces the employee’s pay for some periods of time,
even though it comes out equally when reviewed over the
full year. Employers should communicate the change to
ensure the employee understands and considers the new rate
as fair.
Handling nondiscretionary incentive payments. The new rule
allows for nondiscretionary incentive bonuses to be counted
toward up to 10 percent of the employee’s pay so long as it
is paid at least quarterly. The rule also permits employers to
make a “catch-up” payment following quarter-end to meet
the salary threshold and maintain exemption status. What
does “nondiscretionary” mean? Essentially, nondiscretionary
payments are forms of compensation promised to employees
based upon objective goals (i.e. commissions, production, sales
and retention goals based on a fixed formula). Be cautious
of stated qualifiers in your incentive payment plans such as
“employees in good standing” or “the employer retains the
right.” These may prevent you from counting the payment
toward the salary threshold.
Using bonuses to make up the difference in salary can
be tricky. Nondiscretionary bonuses and incentive payments
made to nonexempt employees must be included in the
regular rate of pay when calculating overtime, so employers
must be sure their employees are properly classified. A mistake
here could be very costly.
Adding staff. Many businesses prefer to pay as little overtime
as possible, so moving exempt employees to nonexempt positions may get in the way of current practice. A company may
want to consider hiring additional employees to take on tasks
or work shifts previously performed by exempt employees in
order to minimize overtime. But be aware that increasing the
workforce adds both direct and indirect costs in training new
employees, paying federal and state unemployment, finding
additional workspace and managing additional workers.
As with everything involving human resources, communication and planning are key to making employees comfortable
with changes. S
STACY SMITH, CPA is a shareholder of Mize Houser & Company
P.A., a full-service accounting firm that offers PayPlus+
Accounting and Payroll Solutions to FBS members.
39
SCORE | 2016 Issue 3
Timekeeping. Exempt employees often get paid without
having to clock in and out or record their hours. Having
to keep track of their time will require these employees to
develop a new habit. Don’t get hung up on the idea that
Fluctuating pay. Exempt employees are used to a flat
paycheck, but fluctuating hours mean fluctuating pay. This is
especially relevant when paying employees for vacation or sick
leave as an overtime rate of 1.5 times regular rate is only paid
on hours worked more than 40 per week. Consider the disincentive of taking a full week of vacation. Pay would be based
on 40 hours of PTO, which may be a lower dollar amount than
the employee is accustomed to.
THE
Scheduling. Employees who are currently exempt are probably working outside normal business hours. Maybe they take
calls in the evening or handle emergencies at the workplace
overnight, or maybe they just keep up with emails via their
smartphone during all waking hours. This will require a shift
in expectations on both the part of the employer and the
employee, as any time worked by a nonexempt employee must
be paid.
everyone must use a time clock system. The DOL allows for
multiple methods of documenting and reporting time.