Hourly vs. Salary Pay for Employees

I wanted to talk to you about hourly versus salary pay for your employees and some common misconceptions there. We also have some new rules that will go into effect December 1st, 2016 that you need to be aware of. First off, salary pay is sometimes issued for managers, and basically, the concept that most people think of is that you will pay them the same amount every week no matter how many hours they work. The problem with that is that that is not always the case. The Department of Labor rules specify who is exempt from overtime versus who still qualifies. If you are salary, that does not necessarily mean that you do not have to pay time-and-a-half for hours over 40 per week.

That is a common misconception and a common problem that can cause a lot of issue for you if you’re ever put to a DOL audit or an employee raises some concerns with a taxing agency. That specification to determine whether somebody is exempt from overtime or not is called exempt or non-exempt. You can reference the Department of Labor rules to determine if somebody is exempt or non-exempt. In a nutshell, if you’re exempt from overtime, that means that you have to have certain powers like an owner to hire and fire people, to maybe issue payments. There are a lot of criteria. You have to have a good bit of power. You can’t just say that somebody’s exempt from overtime and expect that to hold.

{The new rules referred to here have been postponed and are not currently in effect.}

Now, the new rules that go into effect will dramatically change this if you had somebody, even if they qualified for exempt from overtime. The new rules that go into effect on December 1st, and I’ll include a little link to this on our blog post if you want to dig a little further into it, show that anyone who is paid a salary of less than $47,476, a nice round number, isn’t it, is subject to being paid overtime for hours over 40 hours per week. You must pay time-and-a-half on those. To clarify, I highly suggest that for all employees you are tracking their hours on a week-to-week basis so that you know if you qualify for overtime or have to pay that or not, and you can make adjustments near the end of the week to try to get out of that trap if you are in the overtime dilemma.

I strongly suggest that you cut off your pay period on a Friday. That way, you can control throughout the rest of the week if you have a heavy weekend schedule, you can ease up on some of those hours on a Tuesday or a Wednesday to try to compensate so that you’re not having to pay time-and-a-half. That’s just a little insider trick there. Going back to the hourly versus salary, salaried people still must be paid overtime, and I doubt many of you have someone who is on a salary of greater than $47,476. In a nutshell, everybody in your studio is subject to overtime if they work more than 40 hours per week going forward.

Set your systems accordingly. I strongly suggest that you switch everyone to hourly pay. There’s really no upside for you on salary. You still have to track the hours. If they work less than 40 hours a week, you must still pay them the salary. If they work more than 40 hours a week, you still have to pay them overtime, so there’s no upside potential for you to put someone on salary. It just doesn’t make sense in today’s time. Going forward, but as you review, I would strongly suggest that everyone would be on an hourly pay cycle, that you are tracking hours if you’re not tracking hours on a really good time basis, use a time tracking system. It will save you between 2 to 10% on your payroll cost just for that fudge time that happens in there. We have some great solutions for that if you need some help.

I want to end it there. If you have other questions, please let me know. Indicate that in the comments and we’ll be happy to follow up on those, and I’ll include a few links in the blog post directly so that you can reference these new rules and some material from the Department of Labor.

Department of Labor: Final Rule: Overtime Law changes effective December 1, 2016

Donna Bordeaux, CPA with PYOPAccounting.com

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.