Reclassifying exempt employee to non-exempt has implications on many HR systems. None is more important than pay. Because non-exempt employees are paid for hours worked, it is paramount to calculate an hourly rate of pay that is competitive and makes sense for the business and the employee.
This is particularly critical for those who work more than 40 hours a week. Come December 1st, lower paid exempts might be reclassified as non-exempt and will be eligible for overtime.
Not assessing the impact higher labor costs could put your business at risk. Conversely, it might make good financial sense to increase salaries above the new white collar threshold ($47,476) if the overtime bill is high. And, a salary increase is always good news for employees!
How to Calculate Overtime (from page 14 of the Overtime Ready Workbook)
Overtime pay is one and a half the regular rate of pay. The regular rate of pay is the hourly rate plus all non-discretionary payments received by the employees:
- Shift differential,
- Non-discretionary bonuses and commission. Most bonuses are considered non-discretionary.
- On-call pay – If paid regularly (e.g. every 3 weeks), it needs to be included in the calculation of the regular rate of pay.
Excluded from the regular rate are certain payments like:
- Payment in lieu of holidays and vacations
- Payment for medical, disability, or life insurance
Here’s an illustration of how calculating hourly rate can affect your labor costs.
Let’s meet Erin.
She earns $41,000 a year and works an average of 45 hours a week. Depending on how the hourly rate is calculated, the cost to the employer can vary significantly.
Option 1 – Assume Erin’s salary is based on a standard workweek (40 hours, 2080 hours a year), the hourly rate of pay is $19.71.
Starting December 1, Erin would earn overtime for 5 hours a week which is
$148 extra a week or $7,400 over the year.
Interestingly, paying $7,400 in overtime brings Erin’s total compensation to $48,400. In this case, it might make sense to increase Erin’s annual salary above $47,500 and keep her classified as exempt.
Option 2 – Assume instead, Erin’s salary is based on her actual workweek (45 hours, 2340 hours a year) but doesn’t account for cost of overtime. In this case, calculations show the hourly rate of pay is $17.52
Starting December 1, Erin would still earn overtime for 5 hours a week but at a lower hourly rate than option 1. The option 2 amounts to $131 in extra pay a week or $6,550 a year.
Option 3 – Assume Erin’s current salary reflects the overtime hours and cost. Calculating the hourly rate of pay requires a little algebra.
$41,000 = 2080h x hourly rate + (5h overtime x 52 weeks x 1.5 x hourly rate)
Using this formula sets the hourly rate at $ 16.60. Starting December 1, Erin’s base earning would be $34,530 with the potential to earn $6,480 in overtime pay. This is clearly the least favorable calculation for employees. Overtime can never be guaranteed and employees risk a major income loss.
Whichever approach is used, employers must think through calculating a new hourly rate very carefully. Always document the reasoning and the calculations. You know this will be challenged!
For more hourly rates and transition exempt employees through the new white collar exemption rule, get your copy of the Overtime Ready Workbook.
