Executive, Professional and Administrative employees are exempt from overtime requirements if they meet three tests: the salary level test; the salary basis test; and the duties test. As I am sure you have heard, new overtime regulations raise the required annual salary level from $23,660 to $47,476 (or $913 each week). Under the new salary level test, which goes into effect on December 1, 2016, exempt employees paid less than $47,476 no longer qualify for exempt status. So what is an employer to do? Here are some potential options:

1. Retain Exempt Status. Increase the employee’s annual salary to at least $47,476 and the employee will remain exempt. Please note, however, that the rules establish a mechanism for automatically updating the salary and compensation levels every three years; thus, you may be required to again increase the employee’s salary in three years to meet the new threshold. Additionally, the employee still needs to meet the duties test, and this is a good time to review compliance with that test. This is the only option that does not require the employer to track the employee’s work hours.

Example. Currently an exempt employee has an annual salary of $41,600 ($800 weekly) and, therefore, no longer passes the new salary test. Employer raises the employee’s annual salary to $47,476. Employee retains the exemption from overtime pay under the new regulations.

2. Convert to Hourly. Convert the exempt employee from a salary to an hourly wage and begin paying overtime for more than 40 hours worked in a week. The employer must begin tracking the hours worked by the employee. Overtime hours can be controlled by limiting or forbidding overtime without the employer’s express approval.

Example. Currently exempt employee has an annual salary of $41,600 ($800 weekly). Employer converts the employee to the equivalent hourly wage of $20 an hour ($800 ÷ 40 hours). The employee’s overtime rate would be $30 an hour ($20 x 1.5). Thus an employee who works 45 hours during one week would be paid $950 (($20 x 40 hrs) + ($30 x 5 hrs.)). Assuming the employee averages working 45 hours a week during a year, this equates to an annual salary of $49,400 ($950 a wk x 52 wks). Under these particular facts, it would be cheaper to pay the employee the $47,476 annual salary and have the employee remain exempt.

3. Remain Salaried, but Pay Overtime. Have the employee remain on a salary, but pay overtime when the employee exceeds 40 hours in a workweek. This will require the employer to track the employee’s time. The regular rate will be calculated by dividing 40 hours into the weekly salary and then paying 1 ½ times that amount for overtime hours. This may be a good option where an employee enjoys the status of a salaried employee and doesn’t want to become an hourly employee. Overtime hours can be controlled by limiting or forbidding overtime without the employer’s express approval.

Example. Currently exempt employee has an annual salary of $41,600 ($800 weekly). Employer retains the employee at this salary, but pays the employee overtime for any hours worked over 40 in a week. The employees overtime rate would be $30 an hour (($800 ÷ 40) x 1.5). Thus, an employee who works 45 hours during one week would be paid $950 ($800 + (30 x 5)). Assuming the employee averages working 45 hours a week during a year, this equates to an annual salary of $49,400 ($950 x 52). Please note that the employee is paid the same amount whether he is paid hourly or paid a salary. Under these particular facts, it would be cheaper to pay the employee the $47,476 annual salary and have the employee remain exempt.

4. Fluctuating Workweek Plan. Use the Fixed Salary/Fluctuating Work Week plan, which is approved by the DOL regulations. Under this plan, the employee is paid a fixed salary that covers the straight time for all hours worked, including overtime hours. Thus, overtime is paid at a ½ time rate (compared to 1 ½ time rate) for the hours worked over 40 hours. Under this plan, the regular rate must be calculated each week (by dividing the total number of hours worked by the fixed salary). Certain conditions, including prior employee agreement and paying the same salary when the employee works less than 40 hours in a week, are necessary to use this plan.

Example. Currently exempt employee has an annual salary of $41,600 ($800 weekly). Employer retains the employee at this salary, but under the fluctuating hours plan where the salary covers all straight time hours and the overtime is paid at a ½ time rate. The employees overtime rate would be $10 an hour (($800 ÷ 40) x .5). Thus, an employee who works 45 hours during one week would be paid $850 ($800 + (10 x 5)). Assuming the employee averages working 45 hours a week during a year, this equates to an annual salary of $44,200 ($850 x 52). Under these particular facts, it would be cheaper to use the fluctuating workweek plan than to pay the employee the $47,476 annual salary it would take to have the employee remain exempt.

5. Adjust Base Compensation Down. Estimate the number of overtime hours the employee is expected to work each week, and adjust the employee’s wages (either salary or hourly) down so that even with the payment of overtime, the employee makes approximately the same amount he or she did as an exempt employee. This does not mean, however, that the wages can be manipulated each week to come out to the previous exempt salary amount. Employees should be provided notice before their compensation is adjusted down and some states require advance notice (e.g., Missouri). The reduced straight time wages must also exceed the minimum wage. Employee work hours must be tracked.

Example 1. Currently exempt employee has an annual salary of $41,600 ($800 weekly). The employee is expected to work an average of 45 hours a week for the coming year. The employer reduces the employee’s hourly compensation to $16.85. Assuming that the employee works an average of 45 hours a week, the employee will make $41,620.80 in the coming year (or slightly higher than the employee’s current salary).

Example 2. Currently exempt employee has an annual salary of $41,600 ($800 weekly). The employee is expected to work approximately 45 hours a week for the coming year. Employer reduces the employee’s salary to $35,048. Assuming the employer works an average of 45 hours a week, the employee will make $41,620.80 in the coming year (or slightly higher than the employee’s current salary).

6. Piece Rate or Day Rate Compensation. Under these methods of compensation, employees are paid per unit of work or by a day of work. This may work for some employers. Hours of work still need to be recorded, and overtime paid if the employee works more than 40 hours in a week.

7. Other Plans. There are other potential overtime plans approved in the existing DOL regulations, which may work for the employer.

Under any of these options, but particularly options 4, 5 6, and 7, it is important to obtain legal counsel to ensure compliance with all the FLSA requirements.

The Department of Labor offers the following sources that are helpful.

Plenty of Options With New Overtime Rule
Frequently Asked Questions – Overtime NPRM
Guidance for Higher Education Institutions on Paying Overtime Under the Fair Labor Standards Act
Guidance for Non-Profit Organizations on Paying Overtime Under the Fair Labor Standards Act