There are a number of factors to take into consideration in deciding whether a job should be exempt or nonexempt. Even once you’ve determined which jobs are exempt, you’ll need to monitor any changes to the salary threshold. According to the Fair Labor Standards Act (FLSA), one of the foundational criteria for whether an employee can be considered exempt is whether they meet the salary threshold. Effective January 1, 2020, the FLSA salary threshold is $684 a week ($35,568 annualized) for those positions that have a salary requirement.
The previous amount was $455 a week ($23,660 annualized), so this is quite an increase. How do you adopt a strategy to ensure FLSA compliance?
Review your state exemption salary requirement. Most states don’t have their own higher requirement, but some do, including Alaska, California, New York, and Maine. If your state has its own requirement, your employees are entitled to whichever amount is higher.
Determine if you have any exempt employees who are paid less than $684 a week. Take the time to review your pay ranges for exempt jobs as well. You might find that, while you don’t currently have any employees paid less than the threshold, the possibility exists due to pay ranges dipping below the threshold. Now is a good time to be proactive in developing a strategy to address this.
Determine which employees and jobs are impacted. Look at the employees you identified in the previous step to determine the jobs that are impacted. If you have pay ranges established, look at the minimum of each range to determine if any dip below the requirement. If so, add those jobs to your “impacted list” as well. Remember, you want to keep life simple by categorizing each job as either exempt or nonexempt.
(A note about part-time employees – If you have part-time employees in your exempt jobs, you may find that some of them are below the threshold even if the pay range itself would meet the requirement for your full-time employees. It’s a good idea to determine a point at which these employees would change to nonexempt if they worked below a certain number of hours. For example, if they worked less than 20 hours per week, they’d become nonexempt while still remaining in the same job. This would allow you to adjust the part-time employees to nonexempt while keeping the job itself exempt.)
Now, you know which jobs are impacted by the change to the FLSA salary threshold and which specific employees need to be addressed. You have 2 main strategic options. The best decision depends on your budget and employee morale.
#1 – Stay Exempt
Keep the impacted jobs exempt, and raise the minimum of the pay range to at least $684 a week. For the individual employees who were below this amount, you’ll increase their pay to at least $684 a week.
Do the math:
- Determine the basic wage cost of raising the employees’ pay. Depending on the number of employees you’re looking at, you may need to take the time to incorporate any benefits-related costs, such as life insurance and long-term disability.
- Note that there are some domino-effect costs. The minimum pay for these jobs will now be higher. In addition, by shifting the pay range, your maximum pay for these jobs increases as well.
Pros:
- Can be a relatively easy and low-cost option if you have only a few employees below the threshold or the current salaries are close to the threshold.
- Maintains employee morale (for the most part). Employees who are exempt typically enjoy being exempt and don’t want to become nonexempt. Those who receive pay increases will certainly be happy! For those in the same job who don’t receive pay increases, consider explaining any benefits to them. For example, if the maximum of the pay range increased, then they have a greater ability to grow within their current job. You can also remind them that the other option was for everyone in the job to become nonexempt.
Cons:
- Can be a high-cost option if you have a lot of employees below the threshold or the current salaries are much lower than the threshold.
- Creates the possibility for salary compression, which can also impact employee morale. Within a single job, some employees receive increases while others don’t, which puts their salary amounts closer together. For example, Steve, a new hire who has 2 years of prior experience, receives an increase and now makes $684 a week. Steve now makes almost the same as Margaret, who has been with the company for 10 years and isn’t eligible for an increase because she already makes $700 a week. (Shifting pay ranges for jobs can also lead to salary compression with related jobs, potentially reducing the amount of a promotion or making it possible for employees to make more than their supervisors.)
#2 – Go Hourly
Change the impacted jobs to nonexempt, and all the employees in those jobs will start clocking in and out. They’ll be subject to minimum wage and overtime requirements.
Do the math:
- Determine the hourly rate. For full-time employees working 40 hours a week, divide the annual salary by 2080 hours to get the hourly equivalent. Make sure this amount meets the federal (and state) minimum wage requirements.
- Calculate how much overtime you anticipate these employees work.
- Consider if any of these employees would become eligible for shift differentials. For example, if they work third shift, and your other third-shift nonexempt jobs receive additional pay per hour, then you would probably need to tack it on.
Pros:
- Can be a low-cost option if most of the employees are below the threshold or the current salaries are far below the threshold.
- Encourages the morale of employees who routinely work more than 40 hours a week since they can now earn overtime. Granted, this impacts your budget, but it can be a selling point to employees.
Cons:
- Can be a high-cost option if your employees are routinely working more than 40 hours a week. You could end up paying a lot of overtime or having to hire more people in order to decrease the overtime.
- Hurts employee morale for those who take pride in being exempt. I remember talking with a very upset employee about becoming nonexempt and her crying as she explained she’d always been exempt and felt devalued by having to punch a clock. While you and I both know that every single person in every single job is valuable and this exempt/nonexempt classification has nothing to do with value, any changes to compensation can feel very personal, so be prepared to explain that every job is valuable and this is about paying fairly.
Evaluate and Communicate
- Determine which option is best in light of your budget and the potential impact to employee morale. Note that you could also choose different strategies for different jobs. Some jobs could remain exempt while others become nonexempt. This is a good opportunity to also make sure you’re providing a living wage to your employees.
- Communicate to every employee in each impacted job. If you only meet with those whose pay is changing, word will get out even if you ask them to keep it confidential. Confusion and misinformation will spread, and you’ll have missed the opportunity to ensure transparency, credibility, and consistency of messaging. Prepare a letter for everyone describing the reason for the change, what strategic option you’re implementing for their job, and why. Include that pay may be changing for some. For those individuals who are receiving pay increases, you can include the new amount in their letters.
- Meet with each employee individually. Provide the letter and discuss it. Try to anticipate questions and concerns you may receive so you can be prepared. For those receiving pay increases or status changes, put a copy of the letter in the employee HR file.
Maintaining compliance with the FLSA is an important task, so it’s vital to review the changes to the FLSA salary threshold and determine any actions you need to take. It’s much easier (and cheaper) to be proactive in making these changes now than to find yourself in legal hot water later.
Photo credit: By AndreyPopov / Canva
