In our quest to keep our audience as informed as possible regarding issues which affect franchising and small business, we’re going to tackle a topic on hourly workers vs. salaried workers. While the subject has been in the news fairly frequently for almost a year, a new law went into effect on December 1 of last year, stipulating some changes to employee compensation. Let’s look at the facts, breaking down what they mean for business owners with either hourly or salaried workers’ pay schedules.
How did this come about? It turns out that the regulations stipulating overtime pay classifications for white collar workers were last updated way back in 2004. As you’ll probably agree, much in our economic growth pattern and cost-of-living adjustments have changed significantly. The Obama Administration directed the Fair Labor Standards Act to be updated as it pertains to minimum wage and overtime pay standards. It affects small businesses and franchise-based operations by simplifying the identification of overtime-eligible workers, making the exemption easier for employers and workers to both understand and apply.
What we’re specifically referring to is the U.S. Department of Labor’s Overtime Law. It draws a line to classify workers as either hourly or salaried based on the amount they earn in a week. The previous classification for salaried employees was $455 per week, which is now been raised to $913—quite a jump. There are no changes for hourly employees, who are still earning the federally mandated $7.25 an hour. Any employee making less than $913 per week is not considered a salaried employee.
How did they arrive at what may seemingly appear as an arbitrary amount of weekly pay? There was a method to the madness. The figure was determined by setting an updated standard salary level that is equal to the 40th percentile of weekly earnings for full-time salaried workers operating in the lowest-wage Census Region, currently the South.
In addition, the new law stipulates that the standard salary levels for weekly earnings will now be refreshed and updated every three years, as opposed to waiting over a decade during the last go round.
So what does this mean for employers altering standard salary levels in layman’s terms? Here is a quick rundown of options for classifying workers:
For each of the affected employees now entitled to overtime pay, employers can take the following actions:
- Place a reduction or cancel any overtime hours
- Pay overtime premiums commensurate of one and a half times an employee's regular rate of pay for potential overtime hours worked
- Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
- Increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status
- Use a combination of these responses
For a real world example of how the law works, employers might now consider giving raises to employees who regularly work overtime hours and earn slightly below the new standard salary level. This would be done in order to maintain their overtime-exempt status so that the employer doesn’t have to pay any overtime premiums. For employees who rarely work actual overtime hours, managers can simply choose to pay an overtime premium as necessary.
Keep this one fact in mind, however—there is nothing in the updated rule which requires employers to alter employees' pay to hourly from salaried. This is true even if the employees' classification itself changes from exempt to an overtime eligible situation.
For additional reading on the updated U.S. Department of Labor Overtime Law, please refer to their frequently asked questions (FAQ) section of their website, which can be found here.
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