Salary plus overtimeFollowing the big news about the overtime regulations overhaul, I’ve been fielding several calls from concerned HR professionals regarding the actual conversion of certain employees (paid less than $47,476) from exempt to non-exempt by December 1, 2016.  As I predicted, many employees are already voicing concerns about not being paid a salary (and thus, not having a definite salary each workweek, even when 40 hours are not worked). While not interchangeable, people often will say employees are either exempt (salary) or non-exempt (hourly). However, this is not the case.  As I touched upon in my earlier post announcing the new overtime regulations, a non-exempt employee can actually be paid a salary. Here’s how, in 3 easy steps.

Step 1: Pay the Employee a Salary of At Least Minimum Wage 
First, the employee is not exempt from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime protections.  This means no matter what, the employee must be paid at least minimum wage for all hours worked in a workweek. Federal minimum wage is currently $7.25/hr. Minnesota minimum wage is currently between $7.25/hr. and $9/hr., depending on the employer size. Accordingly, a non-exempt employee’s salary must be at least $7.25 x 40 = $290/wk (small employer) or $360/wk (large employer).  Annually, this equates to $15,080 and $18,720, respectively.  However, for the most part, employers will typically use this method for paraprofessional employees (that will be misclassified as of December 1) in the $30k-$47k range, so the minimum wage issue is rarely a factor.  Either way, the employee’s salary must be at least (but can be more) the minimum wage.  Keep in mind too, the whole point is that if the employee works LESS than 40 hours, you are still going to pay the salary. Thus, the employee has a guaranteed income each week, no matter what.  Work gets slow, the employee gets the salary.  Work gets crazy, the employee gets the salary (plus overtime).  However, as you’ll see below – the employer actually pays less for overtime each hour the more overtime the employee works, so it is generally a wash in the long run.

Step 2: Pay the Employee Overtime at the “Regular Rate” for the Workweek

Next, the employee must, like any “hourly” employee, record all hours worked. There are several ways this can be done, which I blogged about here. Why? Because the employee is not exempt from the FLSA, the employee is entitled to overtime (time-and-a-half), for all hours worked over 40 in a workweek (or 48 hours in a workweek for Minnesota businesses if the FLSA does not apply to your business – I’ll stick with FLSA 40 hours for this example).   So, the employee’s paycheck will show the salary for 40 hours plus the additional pay for overtime hours at 1.5 x the regular rate.  What is the employee’s “regular rate” for overtime purposes if the employee is paid a salary?  The regular rate is (unlike an hourly rate), an hourly rate that is determined by actual hours worked and actual monies paid to the employee for a workweek.

To determine the regular rate for any workweek (for a salaried employee), divide the total compensation paid to the employee in the weekly payroll by the total number of hours actually worked in that workweek.  For example: $500/40hrs = $12.50 (regular rate).  $500/45hrs = $11.11 (regular rate).  $500/50hrs = $10.00 (regular rate).  As I noted above, the overtime rate will actually decrease with each additional hour worked.  Thus, the overtime rate for working 45 hours in this example is $11.11 x 1.5 = $16.66.  The overtime rate for 50 hours is 10 x 1.5 = $15.  While this seems odd (that the employee actually gets paid less overtime the more he or she works), the trade off is that the employee makes his or her salary even when working less than 40 hours in a workweek.  Otherwise, if the employee was a straight hourly worker, let’s say $12.50/hr, the overtime is always going to be $18.75, but the employee will only get paid for actual hours worked at the $12.50.  So, if the employee only worked 30 hours in a workweek, the employee would only get paid $375 that week versus the $500.

Also, many employers have pay periods of two week or more.  In this case, the “regular rate” still needs to be broken down to a workweek.  In the case of a semimonthly salary, multiply the salary by 24 (number of payrolls in the year) and divide by 52 (number of weeks in the year).  In the case of a monthly salary, multiply the salary by 12 (number of payrolls in the year) and divide by 52 (number of weeks in the year).  If the employee agrees, the regular rate for a monthly salary may also be determined by dividing the number of working days in the month and then by the number of hours of the normal or regular workday.  I know you know this, but again, the resulting regular rate may never be less than minimum wage for a non-exempt employee (even if salaried).

Step 3: Pay the Employee Additional Overtime After a Non-Discretionary Bonus

Finally, if a non-exempt employee is paid a non-discretionary bonus, that bonus must be layered into the corresponding pay period and included in the “regular rate” (hourly rate) in order to determine the rate for overtime. Remember, as I noted above, the regular rate is used to determine the overtime rate – and the regular rate is determined based on “actual” compensation – which includes all compensation paid to the employee for work (even if that compensation is paid in a later payroll).  Non-discretionary bonuses are compensation paid to the employee for work – unlike discretionary (“just because”) bonuses – such as holiday bonus, summer bonus, whatever.  I won’t lie – this is an administrative nightmare for your accounting team.  For example, the employer must determine what workweeks the bonus is related to (monthly bonus, quarterly bonus, something else?), and then add that compensation to the already earned compensation for that time period, then pay additional overtime for the overtime hours worked during that time period on the now-increased regular rate.  While daunting – it can be done – and in the case of these paraprofessionals who are not often given a nondiscretionary bonus, it can still be worth it.  See my post here for a step-by-step on this process: Paying An Additional Overtime Premium After Paying An Additional Overtime Premium.

So, there you have it.  Three easy steps – (1) pay the salary; (2) pay the overtime based on the regular rate; and (3) pay the additional overtime on any non-discretionary bonus paid.  Voila!