Understanding the Fair Labor Standards Act—FLSA's $10,000 Gift to Employers

My client Paul is both excited and worried. The new Fair Labor Standards Act (FLSA) has been finalized and Paul has employees who must be reclassified as non-exempt. In working through that problem, we found the unintended consequences of the new FLSA will benefit the company--but probably drive the employees crazy.

If, like Paul, you have salaried people doing manual labor of any kind, you need to understand why Paul called me.

When It Matters

Clearly the fast-food chains (and their employees for whom the FLSA was first drafted) will feel the impact. But so will any company that has mid-level managers whose jobs include manual labor.

Paul's managers already make about $100,000 a year. But despite their large paychecks, these employees will lose their exempt status--meaning Paul will have to start paying them overtime--because they manage construction crews where they are required to "do" some of the work they are directing.

In fact, there is no salary cap that will keep them from being considered eligible for overtime pay. Neither the "minimum salary" promoted by the law at $47,476, nor even the "highly compensated" salary of $134,004 can exempt an employee who does not meet the following two FLSA tests:

• The employee’s “primary duty” must be office or non-manual work.

• Employee must “customarily and regularly” perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee...

So any working manager of a field crew, construction team, restaurant, or manufacturing plant could be in for a shock--they must now be paid for overtime work, just like any other hourly employee. (source: DOL "Small Entity Compliance Guide to the Fair Labor Standards Act's 'White Collar' Exemptions")

Surprisingly, this turns out to be a boon for the employer and an embarrassment for the employee.

Employers Will Save Big

Some employers, in fact, will save tens of thousands of dollars.

Why? Because a smart employer is not going to suddenly start paying overtime to a manager who already works 50 or 60 hours a week for their salary. Instead, they'll do some math and simply split the employee's current salary into two pieces: regular pay and overtime. (Here's my salary to hourly calculation.)

Let me say that another way. To satisfy the law, employers like Paul will have to SPLIT the wages they pay to salaried employees. What's that look like? If a manager makes $100,000 in salary now, the FLSA (and some quick math) suggests that we should split that into $53,868 in base salary, $40,401 in overtime, and $5,730 in PTO (paid time off for holiday, vacation and sick days).

Now for the good news: Believe it or not, this will create a windfall cost savings for employers.

Why? Because employer-paid Workers Comp Insurance premiums are calculated on base wages and not on total compensation. This means that where premiums were calculated on a $100,000 salary, they will now be calculated on a $80,800 base wage (as if employees had received only their base hourly rate for each hour worked). In the case of managers doing dangerous manual labor, this could be a $2,500 windfall to the company for each employee!

Employees Will Balk

Unfortunately, this same math will probably not sit well with employees.

Assuming you can explain to them why their $100,000 salary is now just $53,000, it won't take them long to realize that they are now making less than some of the people they manage. And don't even think about showing them their actual hourly wage. (My calculations show that a $100K salary is the same as about $28 per hour in this case.) I predict that conversation will not go well.

Sure, at the end of the year, a working manager's take home pay has not changed. But each and every paycheck will look a lot different than what they are used to. To be clear, I recommend keeping these managers in a "non-exempt salary" pay plan, but you could go all the way and just convert everyone to a simple hourly pay scale.

Finally, I should explain that since salaried folks are often called upon to work lots of overtime, I've simply made the rule that we will pay for 60 hours a week--40 regular and 20 overtime--every week. Not only does this seem (to me) to be the most fair arrangement for the employee, but it also maximizes the employer's Workers Comp benefit. Still, all non-exempt employees must track their hours and submit a report that matches their payroll.

[My FLSA calculations are available in this free PDF showing my conversion of salary to hourly pay. Email me at David@FuseFinancialPartners.com and I'll walk you through the math in more detail.]

Unintended Consequences

I'm sure that this is not exactly what Congress intended when they passed this bill, but for the time being it seems to be true; in some cases, the FLSA turns out to benefit the companies more than the employees.

In any event, it is worth doing: Savings from Workers Comp alone could exceed $2,500 per person for each highly compensated manager in a dangerous construction environment. And, by the way, like all DOL rules, compliance is not optional!

The real challenge will be communicating the change to affected employees...but that's a topic for another day.

Want to talk in more specifics about your situation? Call or write if we can help.

Dedicated to your success,

David