Guide to Preparing for the FLSA Exempt Pay Changes: Month Two, Analyze Your Pay Plans

Last month we began the process of preparing for the FLSA Exempt Pay changes, announced by the DOL in May, by looking at your workforce and their duties.  You can find that article and additional articles on the change on our website:  www.gymhq.club.  This month, we continue our preparation for the upcoming December 1st due date for compliance with a look at employee compensation.

The single biggest change for which owners need to prepare is the new salary minimum.  The salary threshold increases from $455/week ($23,660 per year) to $913/week ($47,476 per year).  If left alone with no changes to the current compensation plans beyond the required salary increase, an owner’s exempt payroll will double!  With payroll constituting one of the biggest expense categories for a business, this could have a major effect on the bottom line.  Here are several considerations to make and examples to use while analyzing a business’s current pay rates and retrofitting them to comply with the new DOL guidelines:

Calculate each exempt employee’s total yearly earnings.  You’ll need to include all compensation including salary, commissions, and bonuses.  Example:

GM Johnny has a salary of $36,000 per year.  He has a commission plan in place that pays him on any memberships sold by him directly as well as a bonus structure based on the achieving 100 new memberships per month.  Looking at the six months he’s been employed, it’s established that his average monthly commission is $300 and his average bonus is $500.  That gives him an estimated annual commission and bonuses payout of $9,600.  So Johnny’s estimated annual income is $45,600. 

If an employee’s current base salary meets or exceeds $47,476, no changes need to be made.

If the employee is close to the earning base stipulated by the new law ($47,476), consider making adjustments to their current compensation plan to bring it into compliance.  Continuing with our GM Johnny example:

The new FLSA pay criteria stipulate that up to 10% of the first $47,476 of the employee’s income can come from non-discretionary commissions or bonuses.  These are bonuses based on clear and measurable goals or a company’s profitability.  That means if we want to cap Johnny at $47,476 for his annual compensation, $4,747.60 of it may come from commissions and bonus.  We can bring his salary up to $42,729 and adjust our commission and bonus structure accordingly.  Where he may have been earning $300 in commission on 30 memberships, now his plan pays him $150.  His monthly bonus is adjusted to $250.  This brings his yearly earnings from these two categories to $4,800.  When combined with his new salary, Johnny’s yearly income is $47,529.  This is only a $1,929 increase to the business for the year. 

If the employee’s current earnings are much lower than $47,476 per year, consider moving them to hourly pay.  Example:

AM Adam has a salary of $24,000 per year.  He earns another $10,000 annually from commissions and bonuses.  That puts his annual earnings at $34,000.  While a review of his job duties indicated that his role does qualify him to be an exempt employee, the business owners have not budgeted $47,476+ each year for his position.   In order to comply with the new FLSA pay rates, Adam’s pay is changed to $11.50 per hour (his salary divided by 40 hour weeks x 52).  He’s required to clock-in and out and his commission and bonus structure remain the same.  GM Johnny carefully monitors Adam’s time clock reports to ensure he’s not exceeding 40 hours per week.

*Luckily our example gym isn’t in California, so Adam is not limited to less than 8 hours per day to stay out of overtime status.

If you’re moving a currently salaried employee to hourly, make sure you factor in the need for and frequency of overtime hours.  Example:

After reviewing the hours Adam typically works, Johnny realizes that he’s averaging 50 hours each week.  He reviews this with the club owners and all agree that Adam is needed for the extra 10 hours each week.  Therefore, Adam will be earning overtime pay.  Johnny will need to be careful to take Adam’s commissions and bonuses into consideration.  For the pay period of August 1st to August 15th, Adam worked 108 hours.  20 of these hours these were overtime.  He also earned another $350 in commissions and bonuses.  Here’s a breakdown of Adam’s pay:

 108 hours x $11.50 + $350 (commissions & bonuses) = $1592 (straight time pay)

$1592 divided by 108 hours worked= $14.74 (regular rate)

$14.74 x ½ = $7.37 (overtime premium)

20 hours of overtime x $7.37 = $147.40 (overtime pay)

Total payout = $1,739.40

If the owner had failed to consider the tendency of Adam’s position to require overtime and had set his hourly rate to $11.50 (and made no changes to his commission and bonus plan), Adam would be set to earn $41,745 per year, which is a lot higher than $34,000.  The cost to the business would be $7,746 annually.  By understanding the implications of overtime pay, the owner could adjust Adam’s hourly rate lower than $11.50 and/or modify his commission and bonus structure.  Considering the need for and frequency of overtime, as well as its cost, is a must when considering a future pay plan for a position.

Consider the cost of admin when deciding to move a salaried employee to hourly.  Who will track the employees’ hours, make adjustments when need, and police overtime?  Who will ensure calculations for overtime pay are properly made?  Does your pay cycle for hours align with your commission and bonus structure?  Example:

Gordon pays his team for hours and salary on a semi-monthly basis, but his commission and bonus structures are based on his club’s monthly sales and performance quotas.  His sales rep Samantha consistently works overtime and Gordon knows he needs to calculate pay based on her regular rate.  However, when he pays her for her hours from the first half of the month, commissions and bonuses are not available.  How does he ensure Samantha is paid out properly?

For August 1st to 15th, Samantha worked 92 hours.  4 of these hours were overtime.  Her hourly rate is $8.  Gordon should pay her the following on her check:

92 hours x $8 = $736

$8 x ½ = $4 (overtime premium)

$4 x 4 hours of overtime = $16

Total pay for this check= $752

At the end of the month, Samantha has $400 in commissions and a $100 bonus.  Gordon is able to attribute $150 of the commissions to August 1st to 15th and splits the bonus in half as it was earned over the entire month.  He then calculates the additional overtime pay due to Samantha for August 1st to 15th.

$200 (commission and bonus) divided by 92= $2.17 (additional income to add into hourly for regular rate)

$2.17 x 4 hours x 1.5 (time and a half) = $13.02 to be added to Samantha’s next check.

Finally, a great place to start when building a compensation plan is to determine how much the position should pay when an employee performs well (if commission/bonus based) and work backwards.

As you can see, there are a lot of points to consider as you work toward December 1st.  Starting now ensures you have the time necessary to put a thoughtful plan together.