Should I pay overtime for salaried employees?
We are a new startup with a small team. We are able to offer our employees minimal salary compensation with some benefits. Everyone has been putting in overtime lately in order to really scale our business and make it successful. I want to the team to know we recognize their hard work but I'm not sure the best way to do so. Is compensating them with overtime smart?
Hi Daniel, I believe the question you must answer first is: What are my obligations as an employer? If it is required by your country's labor law to pay overtime premium then its is not only smart to do that, it is what is legal.
In my case, I started my business with freelancers. I pay them only for the number of hours they work on our projects. If the work load is high, they get to work more hours. Because there's no employer-employee relationship, I am not required to provide statutory benefits, OT and holiday rates, night differentials, etc. If the work load is low, I can reduce their working hours. I was able to grow my team to 8 members and by that time, the business gained more stability so I decided to register the business and operate as a company. For the first 6 months, my workers maintained their freelancer status.
After this time, I realized I needed to provide security and better pay arrangements for my workers in order to keep them from looking for a better-paying job. So I hired them as regular workers, which gave them the rights and privileges stipulated in our Labor Laws. At this point, the business has already grown and our sales became more stable, which enabled me to improve their salary and compensation package.
I now have 30+ employees and my pioneer team is still intact. Some of them were already promoted to management positions. They are the most driven members of my team because they saw how our vision slowly unfolds and how our hard work brought us to where we are now. I have learned that communicating well your vision for the company and for your team is what will keep your them willing to put in more effort to make the business successful. Salary and added benefits are secondary.
Outsourcing some of your tasks is also a great way to maximize your budget and manpower. Instead of having your team work more hours, identify which tasks can be delegated to a virtual assistant so your team can focus on more important tasks that require their expertise (ex. taking care of your clients, growing your business). If you think hiring a virtual assistant for data entry, lead generation or research tasks is something you can benefit from, let me know as we may be able to help.
Just last week a new law went into effect that requires overtime for salaried employees who make more than about $55k. So, if they make less than that, then you'd get into big trouble if you didn't pay overtime. As far as for the others, do you have an incentive plan with bonuses or stock options?
It would be best if they were compensated for their efforts one way or the other. You could pay overtime, which encourages an hourly mentality and management/labor/union tone, or a profit sharing, bonus or stock option program which sets much more of a "we are all in this together" tone.
I understand there are some circumstances where overtime may be necessary, but I think non-programmers misunderstand the true cost of overtime. The result of having your team put in more than 40 hours a week costs a great deal in added bugs, reduced moral, and poor implementations. Don't forget that good developers need a fresh and capable mind to write good software and I very often shift my developers to other tasks or have them stop working if I fear their capabilities are becoming compromised. It costs far less to push your deadline and keep your developers fresh and excited as bugs cost you far more for years to come.
Here is a long response on changes that you will be compelled to make by the end of this year. It makes sense to make a decision now on whether you want to transition these employees to hourly employees who earn overtime or increase the salaries now to meet the new December 1st Mandate. You can associate the increase in pay to their efforts and performance now and put into effect changes now that you will have to make anyway within 6 months.
The FLSA requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime time pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as "exempt" employees. To be considered "exempt," these employees must generally satisfy three tests that focus on how the employee is paid and the type of job duties the employee performs:
1. Salary-level test
Currently, employers must pay employees at least $455 per week to qualify for the executive, administrative, and professional employee exemptions. Beginning December 1, 2016, this amount increases to $913 per week.
2. Salary-basis test
With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
3. Duties test
The employee’s primary duties must meet certain criteria.
There is also an exemption for "highly compensated" employees. These employees are exempt from the FLSA's overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee and earn at least $100,000 in total annual compensation. Effective December 1, 2016, these employees must earn at least $134,004 per year in total compensation, including at least $913 paid on a weekly salary basis.
Note: Most employees are not considered "exempt" from the FLSA’s minimum wage and overtime requirements and are classified as "non-exempt." Employers must pay "non-exempt" employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. Keep in mind your state may have minimum wage and overtime requirements beyond what is required by the FLSA.
New Salary Requirements
The DOL has made the following increase to the minimum salary requirement for the administrative, professional, and executive exemptions:
This means that beginning December 1, 2016, employees who meet the administrative, professional (including the salaried computer professional), and executive exemptions must be paid a minimum weekly salary of $913 in order to be exempt from the FLSA’s minimum wage and overtime requirements. The DOL's final rule also raises the total compensation required for the highly compensated employee exemption to $134,004, including $913 paid on a weekly salary basis.
Automatic Adjustments Every Three Years
Every three years, using figures from the Census Bureau and Bureau of Labor Statistics, the DOL will adjust the minimum salary requirement for the administrative, professional, and executive exemptions to keep it at the 40th percentile of full-time salaried workers in the lowest-wage region (currently the South). Additionally, the total annual compensation required for the highly compensated employee exemption will be kept at the 90th percentile of full-time salaried workers nationally. The first adjustment is scheduled for January 1, 2020. The DOL will publish a notice of updated salary requirements at least 150 days before those changes take effect.
How to Comply:
#1: Ensure that your "exempt" employees are properly classified under the final rule.
Beginning December 1, 2016, employees who receive less than $913 per week are considered "non-exempt" and must be paid at least the minimum wage and overtime. Employees who are paid a salary of at least $913 per week and perform job duties that fall within one of the above categories (administrative, executive, professional, etc.) may be classified as "exempt." If an exemption no longer applies (i.e. the employee no longer performs certain job duties, or earns less than $913 per week), the employee should be promptly reclassified as "non-exempt" and paid overtime in accordance with federal and state law. For employees who are properly classified as exempt, make sure that their job description accurately reflects current responsibilities.
#2: Compare the costs of raising employees' salaries.
Compare the costs of raising employees' salaries to meet the new exemption criteria to what it would cost to reclassify them as non-exempt and pay them overtime when they work more than 40 hours in a workweek. If an employee's salary is well below the new minimum and they rarely work overtime, it might make sense to reclassify them as non-exempt. Conversely, if an employee's salary is closer to the new minimum ($47,476) and they frequently work overtime, you may consider raising their salary to maintain the exemption.
#3: Consider the impact on internal pay equity.
Beyond the costs of raising exempt employees' salaries, consider the impact on internal pay equity. Internal equity means employees are paid fairly when compared with other employees within your company. If you substantially increase some employees' pay, other employees may have questions about why their pay isn't increasing. Also remember that with automatic adjustments every three years, you need to review and adjust exempt employees' salaries at least every three years.
Your options are covered in further detail below.
Option 1: Raise Exempt Employees' Salaries
If you have exempt employees who are paid less than the new minimum, you can raise their salaries to the new requirement. If you elect this option, it is a best practice to review their job duties to ensure they continue to qualify for these exemptions.
Note: For the first time, beginning December 1, 2016, employers may use nondiscretionary bonuses (generally defined as those announced or promised in advance), incentive payments, and commissions, to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. To satisfy the rule, employers may make one final catch-up payment no later than the next pay period after at the end of the quarter if the bonus, incentive payment, or commission ended up being less than anticipated and the employee’s weekly salary plus nondiscretionary bonuses, incentives and commissions does not equal or exceed 13 times the minimum weekly salary of $913. If you provide your exempt employees with these forms of compensation at least quarterly, make sure you factor this in when calculating the potential costs of raising their salaries to meet the new requirement.
Option 2: Reclassify Employees as Non-Exempt
If exempt employees don't meet the new salary requirement, you can reclassify them as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek. If these employees rarely work more than 40 hours per week, simply convert their salary to an hourly wage (divide their weekly salary by 40 hours). However, if these employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium when you reclassify them as non-exempt.
Example: An exempt employee's current salary is $715 per week, the employee regularly works 50 hours per week, and you want to reclassify this employee as a non-exempt employee but keep your costs the same. You would calculate the hourly wage as follows:
This employee would be paid $13 per hour for the first 40 hours and $19.50 per hour ($13 x 1.5) for each hour of overtime.
Employers have until December 1, 2016 to comply. Begin to implement the necessary changes in order to comply with the final rule. Be prepared to address questions employees may have related to timekeeping and pay.
Flowchart: How to Prepare for the Final Overtime Rules
FLSA Frequently Asked Questions
Final Overtime Rules Calculator
This content provides practical information concerning the subject matter covered and is provided with the understanding that ADP is not rendering legal advice or other professional services. Consult experienced counsel for legal advice and review your jurisdictional requirements.
ADP and the ADP logo are registered trademarks of ADP, LLC. ADP – A more human resource. is a service mark of ADP, LLC. Copyright © 2016 ADP, LLC.
I think there are three issues/questions.
1. What expectations did the firm set when it hired the people? And what did the employees accept?
2. Legal obligations vs moral obligations
3. Can you afford it in the short term?.
If you offer someone a job and explain what they can expect in terms of remuneration, other benefits, recognition of their contribution, bonuses, shares, profit share and so forth, they know what they are signing up for. They know it's a start-up and they know that their contributions in the early days will enable the business to grow. If you say at the outset that overtime or additional remuneration is not going to be available in the short term because we are growing and we need all the cash we have to fund growth and employees accept that, then that's the end of the discussion.
If you don't set expectations up front, before a person starts their job, you can be in for a bumpy ride.
I don't think that most people joining a start-up expect big salaries or to be paid overtime while the company is trying to grow rapidly. It makes no sense to join a star-up if you expect big dollars and to receive extra compensation until the company is able to afford it.
LEGAL vs MORAL OBLIGATIONS
Employers obviously have to comply with the law for obvious reasons. Then there's the moral oblifation of rewarding people for the extra effort they willingly put in. If you disclose the company's financial position and where it really needs to spend its cash in the short term, then you are engendering commitment and loyalty.
In addition, the owners of the business should demonstrate that they are not taking big salaries.
What will happen to the company's ambitions if it diverts money from growth strategies into additional remuneration. I think employees can answer that question.
You can set up stock options or profit share schemes or bonus schemes to reward contributions down the track. Start-ups who pay people overtime are being financially irresponsible. Employees understand that they can't have their cake and eat it too.
For example, if the business is a start-up accounting firm, employees know that they are not joining KPMG.
Bottom line, the owners of a small outfit should be consulting employees about what they want. If you layout the company's financial position and projections, employees can see that paying overtime doesn't make sense.
For example, if you say that the company wants to allocate $100k to marketing this year and that money is designed to triple the firm's income, but if we use that money for overtime, we will not grow at all, I think people will get it. They didn't join a start-up to make market rate salaries.
Daniel, you should consult a Utah employment lawyer as soon as you can. Employees are presumed to be non-exempt unless you can show that they meet all the requirements to be exempt. That means there is a good chance they are already entitled to overtime pay, and your company may be incurring penalties for failing to pay your employees what they have earned. There are several exemptions, but they depend on more than just a minimum salary. They have to actually be in exempt positions. An employment lawyer can help you figure out which of your employees, if any, are exempt.
Daniel, the short answer is it's not only smart, it's the law.
If you have non-exempt employees, you must pay overtime for all hours over 40. If you have exempt employees who are being paid less than $23,600 annualized, you must pay overtime for all hours over 40. Beginning December 1, 2016, this annualized amount rises to $47,476. The rule applies regardless of the size of the business or the number of its employees. The rule is based on bi-weekly compensation, so overtime paid is not counted toward the annualized amount.
Bear in mind too that whether an employee is exempt or non-exempt is a matter of definition, not employer preference. The Department of Labor takes this very seriously and has reviewed businesses of all sizes in recent years for compliance.
Misclassification or failure to pay overtime can have significant adverse impacts on a business.
Aside from the Fed requirements for overtime pay there are the larger compensation and morale issues to be considered. If it will benefit your company to pay overtime to salaried employees, great. If paying salaried people overtime then they are truly not salaried, but hourly, else how can you calculate overtime pay? If you believe that everyone must track their time then you are saying, in essence, you are not professionals who we trust but folks whose time needs to be tracked. Good luck with this because your costs will be difficult to manage and your teams will find reasons to work overtime whenever they can and they will begin to become disappointed whenever you tell them that they cannot work overtime.
YOU SHOULD FOLLOW THE LAW! Bottom line right now the law requires you to pay salaried employees who make $32k or less and Obama just changed the law to be $42k or less. As for your other employees, my take is salaried employees should EXPECT to work overtime with no additional pay. When it gets out of hand some type of compensation is nice, but not something required. Rather such efforts should be considered when making annual or semi-annual bonus decisions. That is the best way to thank someone who is salaried in my opinion. Some employees prefer some time off later in return. Ask your employees how they feel about it and take their lead with reason.
I have bee a salaried/contract employee most of my life. The companies I used to work for back in the 70's and 80's paid overtime for anything over 45 hours a week. I also received a lot of "COMP" time as well. This is usually the best way to show them your appreciation without having to disrupt your payroll system.