Corporations Weigh Overtime Compliance Strategies

Adjusting pay ranges to avoid having exempts and nonexempts in the same position

Stephen Miller, CEBS By Stephen Miller, CEBS June 7, 2016

Update: Overtime Rule on Hold

On Nov. 22, 2016, a federal district court judge in Texas placed an injunction, effective nationwide, on the Department of Labor’s overtime rule revision, preventing it from taking effect on Dec 1. The injunction casts doubt on whether the revised rule will go forward at all (see the SHRM Online article Federal Judge Halts Overtime Rule). For now, the rule’s implementation and enforcement are on hold. SHRM Online will continue to monitor and report developments.


Recap: Final Overtime Rule Takes Effect Dec. 1, 2016

The Department of Labor’s final rule revising the Fair Labor Standards Act overtime regulations was released on May 18, 2016. The new rules take effect on Dec. 1, 2016.

Under the final rule:

• The annual salary threshold for exempt positions will jump from $23,660 to $47,476 (or from $455 to $913 per week), and will be updated every three years. That’s more than double the old threshold.

• There will be no change in the duties test used to determine whether employees earning more than the salary threshold must be classified as nonexempt from overtime, including the exemptions for executive, administrative and professional positions, among others.

• For highly compensated employees (HCEs), the final rule raises the annual HCE salary threshold from $100,000 to $134,004. At or above that threshold, HCEs are exempt from the overtime requirements of the FLSA if they meet a more relaxed duties test than is required for employees paid the standard salary level.

(See SHRM Online’s FLSA Overtime Rule Resources page.)

SAN DIEGO—Corporations usually take a year or more to overhaul their compensation programs. But HR managers only have until Dec. 1 to review and revise pay at their companies in order to comply with the U.S. Department of Labor’s Fair Labor Standards Act overtime rule changes, which will raise the threshold for exempt status to $47,476.

(For full coverage of the overtime rule changes, see SHRM’s Overtime Rule Resource page.)

The practical considerations that pay managers are facing include how to handle job families in which the salary range currently runs from below to above the new threshold, where both newly exempt and nonexempt employees are doing the same job. “Some bands start below $47,476—do we lop off the bottom parts?” asked Keith Briscoe, executive director of compensation at computer maker Dell. While he said Dell doesn’t have a definitive answer yet, it is “likely to move everyone up” above the threshold for those positions, or else shift everyone in a job family to nonexempt status.

“We’ve decided not to split jobs between exempt and nonexempt employees,” concurred Susan Brown, senior director of compensation at global technology firm Siemens Corp. “We’ll either raise up the salaries of those under the threshold or shift their duties,” which could mean taking away some professional responsibilities.

Briscoe and Brown were among the panelists addressing overtime issues at total rewards association WorldatWork’s 2016 Total Rewards Conference & Exhibition, held here June 6-7.

Attorney Steven Greene, managing partner at Matthews and Greene law firm near Atlanta, pointed out that it is legal to have exempt and nonexempt workers in the same job, “but from a rewards perspective, it’s definitely something you want to avoid.” Otherwise, there could be resentment if exempt employees feel compelled to work late or on weekends while nonexempt workers are told not to do so.

Melissa Sharp Murdock, senior manager of external affairs at WorldatWork, said the issues confronting Dell and Siemens are common throughout corporate America, where the decision to reclassify workers as nonexempt itself requires further decisions, such as whether to:

  • Maintain workers’ pay rate and pay additional overtime.
  • Maintain their pay rate but limit their hours.
  • Reduce their pay rate to maintain cost neutrality for overtime worked.

In addition, for employees being reclassified, there are options with respect to their duties, including:

  • Newly nonexempt employees retain their professional duties even though they are now paid overtime.
  • Newly nonexempt employees lose some or all of their professional duties.

Using Merit Pay as a Solution

Briscoe and Brown said at their companies, for workers earning 3 to 4 percent below the new threshold (Briscoe said he’d draw a line in the sand at 6 percent), a likely solution would be to use merit increases to bring workers’ salaries above $47,476, and to move the process ahead by one month so that instead of salary raises taking effect on Jan. 1, 2017, they would be effective on Dec. 1—the deadline to implement the new overtime requirements.

That would mean, however, that employees who might not merit a 3 percent increase based on their performance could reap the extra reward. Is that fair to those already above the threshold, who are likely to receive smaller increases? “There will be some unfairness [that employees] will have to live with,” said Brown. It's “not a free for all where everyone gets more money; there is a limit to how much companies can afford to adjust salaries” up the ladder to avoid pay compression. That’s an issue that will have to be worked out through adjustments over subsequent years.

Briscoe said Dell and other companies were likely to consider moving some of the positions slated to become nonexempt offshore, such as call center and business processing jobs, which can be shifted to “lower-cost countries not subject to these rules.”

Flexibility for Nonexempt Workers

Greene noted that for some newly nonexempt employees, “converting them to salaried nonexempt status rather than hourly” was likely, reversing a trend away from the use of this hybrid classification. Salaried nonexempt employees are paid a minimum weekly wage regardless of when their hours are worked, but employers are still required to track their hours and pay overtime if the employees work more than 40 hours in a given week.

Some employers, however, find the salaried nonexempt approach administratively cumbersome. But even so, there are still ways to provide added flexibility for hourly workers, as discussed in a separate conference session that looked at rewarding and retaining Millennial workers. Kim Kurtz, director of benefits at athletic retailer The Finish Line, noted that employers can “find opportunities for flexible scheduling” within a 40-hour week. At one store, for instance, a sales worker was arriving late because, it turned out, she was having day care issues. “Her schedule was altered by two hours, and she became a great employee,” Kurtz said.

When allowing nonexempt employees to telecommute for part of the workweek, technology can be used to track hours and partial hours worked. As to concerns that employees may fudge the time they actually worked so as to claim overtime, “Focus on results—are they getting their work done?” Kurtz said. “Those are the conversations you should be having.”


Analysis: Overtime Salary Threshold Will Rise to $70,966 by 2020

The number of employees who are currently exempt from the mandate to be paid time-and-a-half overtime if they work over 40 hours per week will drop dramatically in 2020, according to new figures compiled by WorldatWork. The data demonstrates the Department of Labor’s final overtime rule will significantly erode the wage configuration of the U.S. workforce over the next 15 years.

Under the final rule, the annual salary threshold for exempt positions will jump from $23,660 to $47,476 (or from $455 to $913 per week), and will be automatically updated every three years to maintain the threshold at the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region.

“Because of the U.S. Department of Labor's auto-update mechanism, there exists the real danger that the exempt classification will head to near-extinction in just 15 years,” said Kerry Chou, WorldatWork senior compensation practice leader.

With the first update occurring on Jan. 1, 2020, “the change in 40th percentile of salaries could be raised as high as almost $71,000,” according to Chou. “While the Labor Department estimated that the threshold will be raised in three years to around $51,000, it misses the fact that once employers reclassify employees who are exempt today to nonexempt by Dec. 1, 2016, they will not be counted in future calculations as they will lose their salary status and become hourly workers. This will cause the 40th percentile of exempt employees to ratchet upward faster than the department's current estimates of projected increases.”

Chou expects that a rapid decline of the exempt workforce will occur throughout the 2020s, ending in 2032 with just 14.4 percent of the nation's current exempt workforce remaining exempt.

A chart created by WorldatWork illustrates the significant increases in the salary threshold that will take place every three years under the Labor Department's own formula.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Articles:

Thoughts on ‘Payroll by Exception’ and Weekly Time Sheets, SHRM Online Compensation, May 2016

Employers Rethink Pay Practices After Overtime Rule, SHRM Online Compensation, May 2016

Overtime Pay Changes Will Affect Employee Benefits, Too, SHRM Online Benefits, May 2016


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