Since the U.S. DOL published its new overtime exemption rules, several people have asked me how one goes about converting a salary to an hourly rate that will give employees about the same amount of pay once overtime is factored in. There are really two parts to this calculation – one quite simple, the other a bit harder.
Step 1: Estimate weekly overtime
For most employers, this will be the hard part. Any accurate projection of compensation for an employee who is entitled to overtime pay has to include an accurate estimate of how many overtime hours an employee is likely to work. This might be fairly simple for employees who work a fixed schedule in an office setting. But remember, when an employee is non-exempt, they have to be paid for all hours worked. This may include work that would usually be done at home or after hours, time spent dealing with work matters during a lunch break, travel and training time, etc. etc. Don’t assume that someone works 35 or 40 hours per week just because that is the nominal schedule.
So how can employers get an accurate estimate time worked by employees who likely don’t currently track their hours? This will vary from workplace to workplace, but some things to consider include:
- Talk to the employees’ supervisors, who hopefully have at least a general idea of when people come in, whether they respond to calls or emails after hours, whether they stay after “quitting time,” etc.
- Look at records such as network access and keycard swipe logs to see when people are likely to be present and working.
- Use some of the time between now and December 1 to start developing a good record of work hours. Start requiring people to record their hours now, before any changes are announced. Or, if that is not practical, at least ask managers to more carefully observe work hours and habits for some period of time so they can provide a more accurate assessment.
Step 2: Calculate the Hourly Wage
Once you have a decent estimate of how many hours an employee works, converting a salary to an equivalent hourly rate is relatively simple. If the employee works fewer than 40 hours, just divide the salary by the number of hours worked. If the employee does work overtime, the math is only slightly more complicated. Here’s the formula:
Hourly Rate = Salary ÷ (40 + (OT hours x 1.5))
For those who don’t like to do math, here is an Excel file that will calculate the amount for you: Calculator – Salary to Hourly Rate
Remember, garbage in, garbage out – if your estimates of work hours are off, this formula will not necessarily result in hourly earnings that are the same as a reclassified employee’s former salary. One way to address this might be to set the rate conservatively, but tell employees that the company will gross up their pay after some period if it turns out to be less than their former earnings. Just be aware that if you do that, the “gross up” bonus may itself have to be factored into overtime.
Also note that this method may not work very well for employees whose hours fluctuate significantly from week to week. For those employees, consider whether the fluctuating workweek method of calculating overtime based on a fixed weekly salary may be a better fit than an hourly wage.