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New Exempt Salary Regs

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By Sandy Seay, President

“Oh, the Money Tree, the Money Tree,

It’s a beautiful sight to see,

Why couldn’t it happen to you and me.”

Margaret Whiting, 1956


In the past several days since the Department of Labor released the final rule implementing the new exempt salary levels, reaction from the business community, and from editorial observers, has been almost universally unfavorable.  The only three sources of positive review that I have seen are:

  1. A college professor (not that there’s anything wrong with that, as I am one myself . . .)
  2. A Department of Labor spokesperson
  3. The President of the United States

Even USA Today, not a bastion of conservatism, has weighed in as opposing the rule.  Nearly all commentators opine that it will be harmful to both employers and employees.

The Department of Labor declares that millions of employees who are now working long hours for low salaries will now be eligible for overtime and will receive higher paychecks.  The DOL does not, however, acknowledge that the money must come from somewhere and does not realize that, instead of incurring higher costs, many employers will change employees to an hourly rate and either restrict their working hours to no more than 40 per week or pay them an hourly rate which, when combined with overtime, yields approximately what the employees have been receiving previously.

Thus, the new DOL salary levels will not provide most formerly exempt employees with higher salaries but most probably will result in stricter and more onerous working conditions, less assurance of compensation and less opportunity for personal initiative and advancement.  Formerly exempt salaried employees who are forced into a non-exempt hourly classification by this new rule will not be happy.

Revival of the Variable Work Week Pay Plan?

One possible alternative to converting salaried employees to an hourly rate is the Variable Work Week pay plan, also called the Fluctuating Work Week.  This pay plan was in general use in the 1940’s, ‘50’s and ‘60’s and is still an effective pay play in certain situations.  Most employers have not used it as much during the past 20 years, although it may be time to bring it back into the main stream.  By means of this plan, the employee continues to receive a salary, but receives half-time for overtime, rather than time and one-half.  This plan has three requirements:

The employee’s hours must actually fluctuate from week to week.  You could not use this plan if the employee’s hours are the same each week.

The employee would receive a salary called the Variable Work Week Base, which covers straight time for all hours worked in a week, regardless of how few or how many.  For example, an employee working 3 hours or 35 hours or 45 hours would still receive the full week’s salary.

However, if the employee works over 40 hours, he or she would receive half-time, not time and one-half.  For example, if the Variable Work Week base is $500, and if the employee works 46 hours, you would divide $500 by 46 to get an hourly rate of $10.87.  Since we only owe half-time, we divide $10.87 by two to get a half time rate of $5.44.  Multiply $5.44 times 6 overtime hours and we get the overtime due to the employee, which in this case is $32.64, which the employ receives in addition to the $500 base salary.

For the employer, the advantage of this pay plan is that the overtime costs are significantly less.  The disadvantage is that an employee who works less than 40 hours in a week must still receive the full base salary.  Thus, an employee who works, say, 28 hours one week would still receive the full VWW base salary.  A further disadvantage is that if a VWW employee exhausts his or her sick leave, and then misses additional days, you would have to pay for the additional days, since the employee must always receive the full VWW base salary in any week in which he works any hours at all.

For the employee, he or she has the advantage of receiving a guaranteed salary each week.  A formerly exempt employee will probably like the idea of a salary, rather than an hourly rate, so the change will not be as much of a psychological hit.  But, the corresponding disadvantage for the employee is receiving half-time, rather than time and one-half, for overtime hours.  In practice, the more overtime hours worked per week, the less the effective hourly rate.  On the other hand, the employee might receive some overtime pay that he or she has not received before, so the employee may be more satisfied, on that score.

Concluding Thoughts . . .

One of the basic facts of economic life is that when you run a business and have to spend some money, the money has to come from somewhere.  If you have children, you have probably said to them at some point, "Money doesn’t grow on trees."  That’s a good lesson for children to learn early.  It may be, however, that the Department of Labor officials have parents who did not teach them this lesson or, perhaps, they didn't listen.

Employers are forced by this new rule to the following alternatives:

Increase the salaries of employees who are close to the new level of $913 per week.
Convert these employees to a lower hourly rate so that their straight time, when combined with the new overtime pay, will be about what the employee is receiving now.

Convert the employee to an hourly rate that is exactly what he or she is receiving now, but restrict the employee to no more than 40 hours per week.

As a fourth alternative, you may want to consider the Variable Work Week pay plan, in certain situations that may be specific to your business.

As always, please contact your Seay Management consultant if you have any questions about the Variable Work Week or any other Human Resources Management issue.  We appreciate having DLI members as friends of our firm.

Very best regards,
Remember, if you have an employment issue or challenge, and you need an answer right away, and you want the very best Human Resources Management advice available, you need to call . . . The Seay Team!

Posted By Harry Kimmel | 5/26/2016 1:36:01 PM