As you may have heard, the U.S. Department of Labor’s Wage & Hours Division has announced plans to more than double the minimum salary level required for employees to be considered exempt. This is a huge deal in relation to overtime, as nonexempt employees are entitled to be paid either 1.5x or 2.0x their hourly pay rate for each hour over 40 hours per week they work.
Currently, employees can be considered exempt if they earn a minimum of $23,660 per year and meet certain standards for their role as a manager or having other specific administrative duties (as outlined under FLSA’s duties test). Under the new guidelines in most cases, an employee will have to earn more than $50,440 per year, thus requiring all employees who earn any less to be paid overtime. In addition, this amount will now be indexed with inflation so it will increase every year going forward.
Since a large portion of salaried employees in hotels make less than $50,440 per year ($24.25 per hour), this change will have far-reaching implications on cost, compliance, and employee morale.
The current expectation is that the changes will most likely take effect at the beginning of 2016 (since these are administrative changes of existing laws and not a new law, this change does not require Congressional authorization). This gives hotels only a short window of time to evaluate their options.
The first thing we recommend every hotel do immediately is to perform a review to determine if you have any salaried employees who are currently making less than the new threshold. If you are a Hotel Effectiveness customer, click here to find out how to identify impacted employees.
The next and bigger step will be determining what to do about this change. Most hotels will likely focus on some combination of the following three strategies:
1. ‘Top-up’ employee pay to be above $50,440 per year.
If some employees are close to the threshold, many employers will likely choose to top-up their salaries to meet the new threshold. This would allow those specific employees to remain exempt, thus saving employers from having to pay them overtime.
2. Convert the employees to an hourly rate assuming a 40 hour work week.
This will be the easiest option but also the most expensive option, as any hours above 40 will need to be paid at overtime rates of 1.5x or 2.0x their hourly pay rate. An example would be an employee who earns $35,000 per year would be converted at an hourly rate by dividing their salary by 2,080 hours per year (40 hours/week x 52 weeks per year) which will equal $16.83 per hour.
3. Convert the employees to an hourly rate based on an estimate of their average hours worked.
This will likely be a popular option because it will allow hotels to comply with the new guidelines while minimizing the cost of overtime. An example would be an employee who earns $35,000 per year and who is presumed to currently work an average of 48 hours per week would be converted to hourly by dividing their salary by 2,496 hours per year (48 hours/week x 52 weeks per year) which equals $14.02 per hour.
Some Additional Considerations
Since in most cases, employers will be converting some current salaried employees to hourly employees, it is important to plan for the following:
• Compliance Impact – At its most practical level, these former salaried employees will now be required to clock in and out. You will need to turn off any auto-pay or automatic hour functionality for these employees in order to have their pay based on actual time clock punches.
• Morale Impact – Being a salaried employee is often an indicator of status for an employee. They may like the freedom of not having to ‘punch the clock,’ the freedom to do work outside of their regular hours, the prestige of being more senior, and the trust that the company puts in them to get their work done on their own schedule. This change has the potential to leave impacted employees feeling like they have lost some of the status and freedom that came with being valued and trusted. It will be extremely important to plan this communication and transition in a way that keeps them feeling aware of what is happening and also still feeling valued by the company.
• Legal Risk Impact – Unfortunately, this change may bring about an opportunity for disgruntled employees to present claims that they should have been hourly (rather than salaried) all along. They could effectively argue that their job duties did not meet the FLSA’s requirements needed to be an exempt salaried employee. Undoubtedly, some law firms will see opportunity and encourage employees to sue their employer over these issues. Since the burden of proof is on the employer in these situations to prove that the employee was correctly considered ‘exempt’, it is crucial that you have clearly documented job descriptions and other documentation that can accurately show the duties of the employees in the event the need arises.
When the new overtime rule takes effect, it will be more important than ever to track employee hours in order to avoid overtime – or hotels will notice a huge spike in labor costs. Fortunately, our labor management software makes it easy for hotels to track employees who are at risk for overtime. If you’d like to see how, click here to schedule a demo or call us at +1 (678) 325-1150.
***For tips on avoiding overtime, download our guide below, Managing Overtime in Hotels!