Q:  I’m hearing a lot about a proposed overtime rule, and it’s hard to know what’s fact or hype. Hopefully you can clarify.  Most of my employees are salaried and exempt from overtime. And we all enjoy the freedom of not having to watch the clock if someone works late, works through lunch or goes home early. On average, my guess is that they work about 45 hrs/wk.  Problem:  About half of them of them currently earn less than $50,440 which is the new proposed minimum.   Does that mean I’d be forced to give them a raise? 

A:  Heavens no.  But you will be forced to give up laissez faire time-keeping.  If the proposed changes take effect next year as predicted, you’ll have 2 choices: increase salaries and keep the exempt status, or reclassify those employees as hourly. If classified into hourly, it means everyone will not only have to watch the clock, but will also have to track and record time, specifically overtime.

Because employees who become hourly will be eligible for overtime if they work more than 40 hours here are some options for keeping your payroll expense under control:

1. Keep the employee’s current hourly rate unchanged but closely manage the schedule by limiting hours to 40. It’s not easy, but it IS possible that the same amount of work now being done in an average of 45 hours, could be done in fewer hours if employees are motivated by knowing that they can’t work over 40 hrs and will be going home sooner.  Prevent overtime by having a policy that requires pre-approval (Note: approved or not OT must always be paid, but employees who do so can disciplined).
2. Allow employees to work around 45 hours but reduce the employee’s current hourly rate so that you can pay for 40 regular hour/wk and 5 overtime hours/wk resulting in the same pay, while getting the same amount of work done. This option sounds fair but it’s actually riskier because you may think you know what they average, but each employee knows exactly how many “extra” hours they work, and who pulls their weight and who doesn’t.  Trying to “average” workers contribution and coming up with a fair number is bound to create discontent.  So beware.

Another option -this time not involving re-classification- is to raise the salary of employees who are close to the threshold.  Yes, this may increase your payroll expense short term but it may be cost-effective because they can work over 40 hours without incurring overtime and you could transfer some duties from employees in option 1 and 2.  This is also risky because these employees will feel like they absorbed extra work and are able to work over 40 hour without extra pay.  So, again, beware.

Stay tuned next week for additional but non pay-related considerations when reclassifying exempt employees.

Related  The “Average Joe” Manager

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Eva Del Rio is creator of HR Box™ – tools for small businesses and startups. Send questions to Eva@evadelrio.com