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Estimating Compensation Costs for Salaried Exempt Employees

The US Department of Labor (DOL) has proposed raising the minimum salary for most employees exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) from $684 per week to a level potentially as high as $1,158 per week. As a result of this change, it is estimated that 3.4 million exempt workers will become eligible for overtime pay.

Employers have a few options for compensating employees who are currently classified as exempt but are paid a salary of less than the new minimum:

  • Increase their weekly salary to the new minimum salary level or higher to retain their exempt status; or
  • Reclassify them as nonexempt and pay them overtime for any overtime hours worked; or
  • Reclassify them as nonexempt, but convert them to hourly employees and set their hourly rate at a level that factors in anticipated overtime costs and is intended to keep their overall pay constant.

This tool can be used to help an employer estimate the costs of each option.

To err on the side of caution, this tool assumes a new minimum salary level of at least $1,158 per week. The DOL will set the new minimum salary level to match the 35th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region at the time it finalizes the rule.

The tool is based on an individual workweek because overtime for nonexempt employees must be calculated each and every workweek. An employer should avoid extrapolating annual compensation costs from weekly estimates for salaried employees unless the number of hours worked each workweek is truly constant.

Bear in mind that this tool is meant only to give a rough estimate and does not take into account several factors that may alter an employee's overtime, such as alternative work periods.

An employer should always consult with counsel before finalizing its pay practices.

Step 1. Enter the Employee's Weekly Salary

If the employee is paid on a basis other than weekly - for example, biweekly, semimonthly or monthly - that salary must be converted to its workweek equivalent. For example, if the employee is paid monthly, multiply their monthly salary by 12 and then divide by 52 to determine the workweek equivalent.

The salary entered should be the employee's gross salary, before taxes and any other deductions.

To obtain a more accurate estimate, include any compensation that must be included in the regular rate of pay, such as nondiscretionary bonuses, commissions, shift differentials, etc., that is attributable to the workweek in question. If the employee is reclassified as nonexempt, this compensation must be considered when calculating overtime due. If the employee is kept as exempt, then nondiscretionary bonuses and incentive payments (including commissions) may be used to satisfy up to 10% of the $1,158 minimum salary level.