Analysis from CFO John Moss

Here’s some time-sensitive news for all of our entrepreneurs, small business owners and employers:

In May 2016, the Department of Labor (DOL) released regulations modifying the Fair Labor Standards Act (FLSA) requirements. While several provisions have been adjusted, changes with the furthest-reaching impact focus on compensation to entry level and middle managers. These proposals have been under active discussion for so long, many business owners have taken a wait-and see-approach, but it is time to act.

The FLSA calls for a two-pronged test for an individual to be exempt from overtime rules and eligible instead to receive a salary:

First, the person’s job duties must meet one of several possible categories. For example, financial advisors and team managers are eligible for exemption. The new regulations do not propose any notable changes to the responsibilities tests.

Second, the employee receive a fixed, minimum salary. Since 2004, this amount on an annual basis has been $23,660 nationally, and somewhat higher in a few states. These regulations increase that minimum salary to $47,476 nationally.

For employers with managers and other exempt employees earning a salary between those two amounts today, there are potentially hard choices to make.

Imagine your business has an exempt manager who currently earns a $35,000 annual salary. For many situations, there are fundamentally two paths:

1) Give the employee a raise to the new exempt minimum and avoid the uncertainty of overtime payments. For our example, that’s an almost $15,000 increase. It’s simply unworkable for many employers.

2) Convert the employee to an hourly pay rate while keeping all of his current responsibilities. But, at what hourly rate?

In the simplest version, you might assume he will work roughly 2,100 hours per year (including paid vacation) and divide 2,100 hours into $35,000, creating a new hourly rate for the employee of $16.67 per hour. In order to keep costs in line, you’ll need to watch the employee's overtime hours.

Before you begin controlling hours on the job, you should probably have a look at how much the employee really needs to work to get the job done. For example, if your manager needs to average a 50 hour week, that would be roughly 2,600 hours a year. So, let’s say 2,100 hours at the regular rate and 500 hours at overtime. At 1.5 times the normal rate, that’s the same as 2,850 regular hours. Setting an hourly rate of $12.25 an hour for that manager would comply with the law, leave your expected total compensation expense unchanged over the course of a year and still anticipate the employee’s needed hours on the job.

There are still some considerations. First, managers who have worked their way up into a salaried position may experience a loss of perceived status in going back to an hourly rate. The conversation could be uncomfortable between business owners and an important group of their team. Management could become more difficult, if you are attempting to control hours worked or if you haven’t sufficiently planned for overtime and are expecting an employee to do more in less time. 

Each business will have to find its own path. Work closely with your HR and legal advisors as you work through each situation. But don’t wait! Choices must be made and in place by December 1, 2016.