On the heels of New York’s increase to the minimum wage, the U.S. Department of Labor has significantly increased the minimum salaries for exempt employees. Effective December 1, 2016, most employees cannot be categorized as exempt from overtime unless they make a minimum of $913 per week or $47,476 per year. For highly compensated exempt employees, the minimum salary will be $134,004. The new administrative rule also provides that these figures will be adjusted every three years so they will continue to escalate in the future.
Now is the Time to Prepare
If you have exempt employees who are making less than $913 a week, you need to decide whether to increase their salary and continue them as exempt employees, or change them to hourly employees and determine what the appropriate wage should be. For those who will be converting their salaried employees to hourly employees, there are a number of steps that should be taken now in order to ensure that your business needs are met when the transition occurs.
The most important step you can take right now is determining how many hours a week your salaried employees actually work. If you do not correctly assess this variable, any financial projections you make will likely be inaccurate.
Many salaried employees work more than 40 hours in a work week, making the calculation of an appropriate hourly rate a challenge. If you currently have an employee making $30,000 a year, and divide that wage by 40, the hourly rate would be $14.42. However, if that employee works one hour of overtime per week all year, you will pay an additional $1,125. The annual pay has now gone up. The $30,000 a year employee who regularly works 50 hours in a week would be earning $41,250 annually if you do not adjust the hourly rate to address the overtime. You would have to pay that employee $10.49 an hour in order for the 50 hour work week to cost only $30,000 per year.
These calculations will have an impact on your internal pay equity. Effective December 31, 2016, the minimum wage in Northern New York will be $9.70 per hour, which is very close to what this $30,000 per year employee would be paid for his 50 hours of work. Wage compression is going to be a challenge for New York employers for the next several years as these issues get ironed out.
Build a Compliance Team
This will be a major change for your operations. Bring together people who actually know how your company works, and what your financial constraints are as you develop a plan. You should include someone who is good with spreadsheets, someone who knows your work flow, someone who knows your financials and someone who knows the rules, including your own internal policies and the Fair Labor Standards Act. Your compliance plan should include training for your employees, and a review of your travel, leave and attendance policies. They may need updating. Employees who are moving from an exempt position to a non-exempt position will not like the transition, and if you are able to increase the flexibility of your leave policies for non-exempt employees, it may help make the transition easier.
Your transition plan should include identifying employees who make less than $47,476 per year, accurately recording the hours worked by exempt employees between now and December 1, calculating the current hourly rates (based on hours actually worked), calculating new hourly rates, and communicating the information to your employees. Make time for one-on-one communication with each effected employee, and be prepared for employee resistance and feelings that the loss of the exempt classification will be seen as a demotion. It is important when change of this nature occurs to assure employees that they are important to the success of the organization, because they are.
Now is the time to plan for these changes, along with the December 31 increase to the New York State minimum wage to $9.70 per hour. December will be here before you know it. The financial impact of these changes will be worst for the unprepared. Next month, look for a follow-up article in SB on wage and hour basics.