The new overtime regulations under the Fair Labor Standards Act's “White-Collar Exemptions” will be effective Dec. 1, 2016, barring action on recently proposed legislation and recently filed lawsuits. The minimum salary necessary for an employee to qualify for exemption from overtime will be $913/week or $47,476/year, and will increase every three years.

Appropriate business planning requires employers to understand the math and associated costs to inform decision-making and achieve compliance.

The requisite analysis must be undertaken with respect to all U.S. employees currently classified as exempt but earning less than $47,476 per year. Employers must either adjust the salary of target employees to try to maintain their exempt classification or reclassify target employees as non-exempt and overtime eligible. The anticipated costs will vary based upon this threshold decision and as the result of the different options for structuring compensation within each category.

With respect to employees as to whom exempt status is sought to be maintained, employers have three primary options for structuring pay. Irrespective of the method chosen, an employer must nevertheless ensure that the new salary is paid on a “salary basis,” and that the employee satisfies either the executive, administrative or professional “duties tests.”

1. Raise the salary of any employee earning less than $47,476 per year to an amount equal to or in excess thereof. For employees who are compensated by salary alone, the math and overall cost is straightforward: An employer will realize a cost of $7,476 with respect to an employee earning $40,000 per year.

2. Explore a reconfiguration of compensation if the employee earns a salary in addition to other pay (i.e., an annual bonus). For example, if the employee earned a $10,000 bonus in addition to the $40,000 annual salary, the employer can reduce the bonus by $5,000 and add this amount to the employee's salary. The employer would thus realize a cost of only $2,746 to achieve compliance. Commission plans, incentive pay schemes, and benefit structures can also be adjusted to similar effect.

3. Take advantage of a provision in the new regulations that allows up to 10 percent of the $47,476 salary to be met by other compensation such as non-discretionary bonuses, incentive pay or commissions. Thus, an employer can increase the salary to $42,728.40, provided the employee earns an additional $4,747.60 through these other means. Note, however, that if this provision is relied upon, these supplemental payments must be made on at least a quarterly basis.

With respect to employees an employer decides to reclassify as non-exempt overtime eligible, an employer has three primary options for structuring pay.

1. Convert the weekly salary into an hourly rate and pay overtime for hours worked in excess of 40 on the basis of that rate.

The simplest conversion method is to divide the employee's current weekly salary by 40 hours. Assuming an $800 weekly salary, this would result in a $20 “regular rate” and a $30 overtime rate. The anticipated cost increase will vary based on overtime hours worked, from $0 if the employee consistently works 40 hours per week to $300 if the employee works 50 hours per week. This conversion method is potentially the most costly and should be used only where expected overtime hours are close to zero.

A more complicated conversion method is to divide the weekly salary by regular hours and expected overtime hours. Under this method, if the employer expects that 10 overtime hours will be worked, the $800 weekly salary will be divided by 55. The 55 consists of 40 regular hours and 10 overtime hours, with the latter multiplied by 1.5 to account for the time-and-a-half premium. The regular rate would be $14.54 and the overtime rate would be $21.82, resulting in roughly equal earnings if the expected overtime hours are worked. This method is the most cost neutral and can be used to approximate total weekly earnings prior to reclassification provided the employer gains an accurate understanding of total hours worked.

2. Choose a new hourly rate altogether upon which overtime would be paid. The only restriction is that the employee continues to earn at least the applicable minimum wage. An hourly wage of $17, roughly midway between the two prior examples, results in total weekly earnings of $935 if 10 overtime hours were worked. While this method allows for controlled cost increases or savings, it lacks an objective rationale and may prove difficult to communicate to affected employees.

3. Convert the employee to non-exempt status, but continue to pay the employee on a salary basis. An employee treated in this matter will, however, be eligible for overtime. As above, there are various manners in which to proceed, each of which have different cost outcomes.

Employers can divide the $800 weekly salary by 40 hours to achieve a regular rate of $20/hour, and pay for any overtime at the rate of $30/hour. This is the simplest, but most expensive, approach. The expense is compounded by the payment of the weekly salary even if the full 40 hours are not worked.

Brian D. Murphy, a partner in the labor & employment practice group at Sheppard, Mullin, Richter & Hampton in New York, can be reached at [email protected].