Employers faced with more than doubling the minimum salary paid to employees to maintain their overtime exempt status basically have two choices. First, they can increase the employees’ salaries to the new minimum. Second, they can convert the employees to non-exempt and begin paying overtime after 40 hours in any workweek. The second option may actually result in employees’ base salary being reduced in anticipation of overtime pay.
The employer could either continue paying the newly non-exempt employee on a salaried basis, or could convert the employee to hourly (either way, an hourly rate is used for calculating overtime). If the employer assumes that the employee will work a certain amount of overtime, it could reduce this base salary/hourly wage to take into account the additional anticipated overtime pay earned. In other words, in order to remain “neutral” in terms of total compensation, the employer would provide less straight-time pay over the course of the year.
The Department of Labor has confirmed that this reduction does not violate the FLSA. Obviously, it may create significant employee relations problems for companies faced with employees who view the conversion as a pay cut. Even if the employer tries to make total pay equal to that under the prior salary, it may need to adjust this new pay level up or down based on the amount of overtime actually worked. Employers should determine their reaction to the new salary level well in advance of the rule’s December 1 effective date. Many states require some advance written notice to employees of changes in their pay that could result in a decrease in compensation.