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Changes To The Overtime Rules And How They May Affect You

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Changes To The Overtime Rules And How They May Affect You

Posted by Payroll Data Processing in Blog Jun 14 2016

Thanks to the Fair Labor Standards Act of 1938 (FLSA), workers are guaranteed overtime pay at time and a half for any hours they work beyond the standard 40-hour work week, with exceptions to the rule based on the duties of the employee.

Exemptions exist for executives, professionals, administrative employees, outside consultants, and a few other classes of salaried employees. Employees that fall into this category are considered exempt employees.

The current threshold value for exempt employees is currently $455 per week or ($23,660 per year). You cannot consider someone exempt if they were not paid more than $455 per week. Starting in December 2016, the salary threshold will move to $913 per week (an annual salary of $47,476).

Lower-wage businesses and service industries like hospitality and retail are understandably against the new rule. A press release from the National Retail Federation (NRF) declared the new overtime rules to be a “Career Killer.” NRF contends that instead of increasing salaries to raise workers above the overtime threshold, many businesses will simply reclassify professionals as hourly workers, removing their existing perks, flexibility, and certain benefits.

However, not is all lost. You can still pay a salary to someone that is considered nonexempt that covers work for the 40 hours in a week. Any time they work over 40 hours, all you are required to pay is the premium portion of the effective hourly rate.

Let me give you an example. Your currently have a manager level employee with a yearly salary of $38,000. The effective hourly rate is calculated by dividing $38,000 by 2080 hours (40 hours per week times 52 weeks) to come up with an $18.26 effective hourly rate. If the employee works more than 40 hours in a given work week, the effective rate for overtime would come to $9.13, or half of the hourly rate, which is referred to the premium portion.

You could actually take this even further and pay them coefficient overtime. To calculate coefficient overtime you divide the weekly salary amount by the actual number of hours in given work week. You then establish an effective hourly rate and pay overtime based upon that variable rate per week.

With our example above, a person paid $38,000 would have an effective weekly wage of $730.77, ($38,000 divided by 52 weeks). If that employee works 42 hours, their hourly rate base rate for overtime would be $730.77 divided by 42 hours or $17.39. Half of the hourly rate for overtime would calculate to $17.39 (2 hours at $8.69, the premium portion).

Now if that employee works 52 hours in the week, you divide $730.77 by 52 hours. You come up with an effective hourly rate of $14.05 and the premium rate would then be $7.02. 12 hours at $7.02 comes to $85.32 in overtime wages. So the more hours your employee actually works decreases the effective hourly rate.

Both are legal ways to pay salaried nonexempt employees overtime. The disadvantage of using half time includes problems with morale, difficulty retaining employees and administrative burden in calculating pay. However, if explained to the employees that they keep the remaining perks as an exempt employee, it is an easy solution.