When a new development arises in employment or labor law, our clients often learn about it from their newsletter subscriptions. Then they come to us for guidance on implementation: the implications of various options, managing conflicts with other policies or procedures, harmonious drafting, etc. That pattern does not appear to be working for the recent change in federal overtime regulations.
While the newsletters did a good job of announcing the change, our clients and others have been left asking many questions. Fortunately, those questions have answers.
How Should the Rule Change Be Implemented?
One of the questions concerns the fundamental issue of how to implement the change for currently exempt employees whose compensation is below the new threshold. In Minnesota there are four ways to manage this, when increasing the worker’s salary to retain the exemption is not practical. Some states do not allow all of these options.
The simplest way is to compute the person’s average hourly wage based on their current schedule and compensation; work backward to determine what the hourly rate should be, given the specific frequency of overtime hours; pay them as nonexempt, including overtime at the 1.5 rate. This approach, which would work in most situations, entails the least disruption.
A second way is to continue paying them a fixed salary, which would compensate them for a workweek of fluctuating hours. This approach still requires that overtime be paid, but at the reduced rate of 0.5 their regular rate. Again, there should be a preliminary computation of the current average hourly rate, factor in the frequency of overtime, and calculate a new weekly salary. The regular rate in these cases must be recalculated weekly, and there are several preconditions necessary for this approach to be lawful.
The third approach is still to pay a fixed salary for a fluctuating workweek, but the salary includes all overtime (up to an aggregate of sixty hours worked per workweek). This third approach requires more preconditions in place than the second approach, and therefore applies to the fewest situations.
Finally, the only approach which does not involve overtime is to reduce the affected employee’s hours to forty per week, and to hire or assign a different person to work the balance of hours necessary to accomplish the job’s requirements. This approach is the most disruptive, because it reduces the affected employee’s compensation, inserts an additional person into the mix, and risks increasing the employer’s non-wage benefit costs.
Selecting which approach to use in restructuring an affected employee’s compensation depends on several factors, including the requirements of the specific jobs; the employer’s budget, in terms of both dollars and flexibility; the terms of any applicable contracts; retention issues; and the employer’s objectives. Implementing the first and fourth approaches may not require an attorney’s assistance. The second and third approaches should be undertaken only after consulting with a knowledgeable attorney or other specialist in wage and hour law.
What Effect Will the Rule Change Have On Labor Costs?
Another concern being voiced frequently is how to fit the rule change into an existing personnel cost structure. The budget is one of the drivers in selecting one of the four options above. If the appropriate preconditions exist, implementing the rule change could be cost-neutral; otherwise, there will be a change to the labor cost. Selecting an implementation option, therefore, involves understanding the alternatives, defining the relevant factors noted above, and ranking them.
How Can These Changes Be Communicated With Least Disruption?
Another question heard frequently is how to communicate these changes. The first step in addressing this issue is to determine whether the possible problem is one of prestige or money. Some employees may bristle at no longer being considered exempt. Most employees would bristle at a decrease in compensation, particularly if their overtime hours and associated wages will be given to a different person. Changes in label from exempt to nonexempt are easier to manage, although the emotional aspect of a classification change should not be underestimated. Communicating financial changes is more difficult. In those cases, it is often advisable to explain the problem with the affected employee and to solicit ideas; again, the emotional piece is important.
Additional issues are discussed in another article on this site. See “Trade Secrets, Overtime, and Other Priority Developments.”
Do you have questions or solutions not discussed above? We’re interested to hear them. You can add a Comment or send us an e-mail. And, of course, we’re available to answer questions and to assist with the transition.