The Labor Department's new overtime rule proposal changes the minimum salary level for overtime exemption from $23,660 to $50,440 starting in 2016 or whenever the rule is implemented. Currently, of course, just offering a salary at a certain level doesn't mean an employee qualifies--the job description still has to meet the qualifications for exemption. This change means everyone earning less than $50,440 is automatically eligible for overtime, regardless of actual responsibilities.

To be clear, while the goal of this change is to make more people eligible for time and a half for working overtime, it's a huge step backward. We're not the manufacturing economy that the original Fair Labor Standards Act was designed for. We're a knowledge economy and knowledge is much harder to measure in terms of hours than manufacturing is. You can't accurately judge how long it took someone to come up with an idea, the way you can judge how long it took someone to manufacture a widget. Do you pay someone for the time they spent pondering a work related problem while jogging? It's complicated.

You can't pay for knowledge by the hour. But this new rules make you do just that. Here's what you need to do to implement the new rule.

Sort all your exempt employees by salary.

Anybody whose salary is less than $50,440 per year is affected by this. Every single one, regardless of that person's job description.

Determine how many hours each person actually works.

Some exempt employees regularly work only 40 hours per week. This means that the new overtime regulations won't really be a big problem. You can simply take their weekly salary and divide by 40 to come up with an hourly rate. They may get an hour or two of overtime over the course of a year, but it's not a big deal.

However, some exempt employees regularly put in 50 or 60 hours per week. You have to carefully consider what you do with this situation. Here are some options:

  • Bump up the salary to $50,400. This scenario makes a lot of sense if the person is making close to this amount anyway. Employees whose salaries are brought up to the threshold can remain exempt and you have no more headaches.
  • Figure out how to pay them the same amount annually, even if they work a tremendous amount of overtime. To figure out the right hourly rate for someone who normally works 50 hours a week, begin with X*40  (1.5X*10) = weekly salary. Solve for X, which is the hourly rate. So, if the annual salary is $40,000, then the weekly rate is $769. Using the formula, X*40 (1.5X*10) = 769, and solving for X, we get X = $13.98 per hour. That rate seems really low for someone making $40,000 a year, but the math works (regular pay = $13.98*40 = $559.20; 10 hours of overtime = 20.97*10 = 209.70; $559.20  209.70 = $768.90). 
  • Divide the annual salary into an hourly rate and pay the extra in overtime. This is the hope of the Labor Department, but you'd be a fool to do this blindly. Take your person making $40,000 a year who works 50 hours per week. That $769 weekly pay is $19.25 per hour. Adding 10 hours of overtime at $28.83 per hour equals an additional $288.30 per week, for a total paycheck of $1,087.38. This works out to be more than $50,440 per year, so you're better off raising the salary and keeping the person exempt.
  • Mandate no more overtime. You inform and enforce the rule that there is to be no more overtime work for your new non-exempt employees. Legally, you do have to pay if anyone does work--even without permission--but you can also fire the person after you've paid him.

That's how to work the pay, but you are also going to have to consider a bunch of new things.

Time clocks. These people all have to record time. If some of your workers are remote, you'll have to figure out a way for them to record time.

Rules around email and phone calls. Because these employees have been correctly classified as exempt, you and they are probably used to sending email in the evening or on the weekend, or having a quick phone conversation after the kids are in bed. No more. Either these people need to be strictly forbidden from responding to email and phone calls outside work hours or you need a way to record the time they spend doing these things. Don't think, "Oh, it's no big deal to respond to a couple emails." It is a big deal if you don't pay them properly.

You're no longer required to pay for short absences. If an exempt employee has a doctor's appointment in the middle of the day, you can't dock pay. But these employees are now non-exempt, which means taking an hour out of the middle of the day, a long lunch, or going home early all result in a cut in pay. Make sure your employees understand how this rule has changed.

Unhappy employees. Being made non-exempt after you've been exempt often feels like a demotion. It will especially feel like a demotion if someone who was previously included in after-hours discussions is now excluded because the business can't afford to pay that person for the extra time. While they may get excited at the idea of being eligible for overtime, it's doubtful that many employees will see an actual increase in take-home pay. After all, it's not like companies have gobs of money sitting around that they can use to increase paychecks. You'll have to meet with each employee individually to explain how this is going to affect them.