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Will Your Employees Care When They are Re-Classified as Non-Exempt?

The US Department of Labor has recommended an increase in the proposed minimum salary level for exempt employees to $970 per week or $50,440 annually.  The current minimums are $455 per week or $23,660 annually.  It is anticipated that the final regulations will come out in July of 2016.  It is expected that the regulations will be effective shortly thereafter, leaving employers little time to react.

Employers will face many challenges as the new regulations go into place.

The time to plan is now.

The rationale for making an employee exempt is that they are a valuable contributor to your business and they will work until they get the job done. Usually, these employees receive more perks such as the ability to leave early without using PTO. Additionally, they usually have a stronger emotional tie to the company and its operations.

To begin our analysis, you will need to take a look at your employees’ current annual salary

If an employee makes close to the new threshold, you may just want to increase their salary to the new minimum. This method would create the least amount of disruption and your employees would be happy to accept a raise. And, they get to keep their exempt status!

In most cases, employers will have to look at changing various employees from salaried to hourly employees.  This creates many challenges:

  • How much more will this cost the employer in labor dollars?
  • Will this be demotivating to employees?
  • Will employees feel that they are losing the prestige that comes with being an exempt employee?

Switching employees from exempt to hourly without creating a plan is a big mistake. Take the time to determine the best course of action and create an employee communication plan to help minimize cultural upheaval.

The easiest method to consider in making the transition to hourly would be to take their current annual salary, say $40,000 and divide by 2080 which is the annual number of hours in a 40 hour workweek. Their hourly wage would be $19.23 / hour. But what if your average employee currently works 50 hours per week and you want to keep your payroll consistent? Then you will need to convert their salary to a lower hourly wage to account for 10 hours weekly of “guaranteed overtime”. So, the employee making 40,000 would be converted to an hourly wage of $13.99. This is $5.24 less than a 40 hour workweek conversion.

This will not go over very well.

It is likely that most employers will simply convert salaries to an hourly wage based on a 40 hour work week. If they cannot modify workloads and production to facilitate a 40 hour workweek, their labor costs will rise.

Some employers currently promote a 40 hour work week and these employers may think their employees will be just fine with the change in status. Do not underestimate the psychological effect this change might have on your team. Exempt employees are going to lose some of the benefits of being an exempt employee. Attempts to fix this with extra rewards, such as additional PTO should not be made without consideration to costs. Remember, these employees are now being paid on an hourly basis and if they work more than 40 hours to get the job done, you must pay them overtime.

When you make the necessary transitions; you must communicate the rationale to your employees in a way that minimizes their negative feelings of losing the prestige and perks of being an exempt employee. Be sure to emphasize the positives of the changes and assure them that they are valued and appreciated.

SERPEO can help! We are all things HR and we help our clients create compliant workplaces with exceptional cultures.

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