14 | Classification Guidebook © 2024 Seyfarth Shaw LLP | www.seyfarth.com regular rate of pay equals or exceeds the minimum wage. Timekeeping and sound recordkeeping is a must for any non-exempt employee, regardless of pay method. Some drawbacks to the day-rate method are that: (i) the employee must receive the full day rate even if she works only a partial day; (ii) the employee cannot receive any other forms of compensation for their services; and (iii) the calculation is more complicated in states with daily overtime requirements, like California. Specific drawbacks to the piece-rate approach are: (i) it is more complicated in states where daily overtime is required; and (ii) in some states, like California, the piece rate cannot be deemed to cover waiting time or other non-piece work—instead, an hourly rate must be paid for any non-piece work performed. And when an hourly rate is paid alongside piece rates, overtime pay calculations become more complex. 4. If you prefer to use an hourly rate of pay, what should the hourly rate of pay be? It is of course acceptable, and most common, to pay non-exempt employees via an hourly rate of pay. In deciding what hourly rate to pay a formerly salaried exempt employee, the following two options are most common: Option 1: Divide the employee’s pre-reclassification salary by 2,080 hours—i.e., 40 hours per week x 52 weeks per year—and use the resulting rate as the employee’s hourly rate. For instance, if the employee was earning a salary of $40,000 per year, then her new hourly rate would be $19.23 (i.e., $40,000 2,080 hours). The benefit of this approach is that it is simple for the employer to calculate and fairly straightforward for the employee to understand. The risk is that this approach does not account for overtime, which could cause total labor expenses to increase drastically. Option 2: Structure an hourly rate that approximates the employee’s former salary, inclusive of anticipated overtime hours and accounting for the fact that there are weeks in which the employee likely will work fewer than 40 hours. One way to do this is to approximate the number of weeks worked during the year and average hours during those weeks. To illustrate, assume you are reclassifying an employee who was earning $40,000 per year. Assume that you expect the employee to work an average of 45 hours per week and 50 weeks per year going forward. This would equate to 2,000 non-overtime hours (i.e., 40 hours x 50 weeks) and 250 overtime hours (i.e., 5 hours x 50 weeks). The first step under this approach is to determine “adjusted total hours” by adding anticipated non-overtime hours (i.e., 2,000 hours) and 150% of anticipated overtime hours (i.e., 375 hours). Then divide the employee’s old salary by the adjusted total hours. Building on the example above, the adjusted hours total is 2,375 hours (i.e., 2,000 non-overtime hours + 150% of 250 overtime hours), and the hourly rate would be $16.84 (i.e., $40,000 2,375 hours). The benefit of this approach is that it will keep in check the potentially larger labor costs caused by the reclassification.
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