With the DOL’s new overtime exemption rule set to go into effect on July 1 and no ruling yet on the state of Texas’s motion to put the rule on hold, employers will need to decide what to do with exempt employees whose minimum salary falls below the new threshold.
For some employees, the best path may be to convert an exempt employee’s salary to an hourly rate so that employees’ take home pay remains steady once overtime is factored in. In principle, this is relatively simple: just calculate how many hours the employee is expected to work, then do the math to back in to the correct hourly rate. In practice, things can be a bit more complicated.
Link to Step 1: Estimate weekly overtime 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 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. Don’t assume that someone works 35 or 40 hours per week just because that is the nominal schedule.
Some states, including Illinois, already require employers to maintain accurate records of daily work hours for all employees, including exempt employees. However, most employers do not regularly track exempt employees’ working hours. In the absence of accurate time records, employers are left to estimate. This might entail speaking with supervisors, who hopefully have at least a general idea of when people come in, whether they respond to calls or email after hours, and whether they stick around after “quitting time.” Employers can also look at records such as network access and keycard logs to see when people are present and working.
Of course, once an employee is classified as non-exempt, it is vital to maintain an accurate record of their hours. If the recorded hours do not match up with prior estimates, employers can either adjust employees’ hours or adjust pay rates to ensure that employees are fairly compensated. Of course, such adjustments may create employee relations issues. People may not appreciate having their hours changed, and while they don’t typically mind pay increases, pay reductions will be less popular.
Link to Step 2: Calculate the Hourly Wage 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
Link to Caveats Caveats
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.