Compensation

Supervisor Overtime Scenario

Options

There are several options for bringing the company into compliance with the new FLSA requirements for this employee population. These include:

• OPTION 1. Bring all current production supervisors salaries to $47,476. Change the minimum of the range to $47,476. This eliminates the need to pay overtime and will not require change to existing policies and practices. Things to consider:

  • This will increase production supervisor payroll by $922,956 per year (first year).

  • Current salaries reflect differences in experience and tenure. Moving all supervisors to a minimum pay of $47,476 will eliminate these distinctions, and will result in internal equity concerns.

    • How will supervisors whose pay does NOT increase feel about the substantial increases their lower-paid peers are receiving?

    • The company may need to consider increasing pay for all supervisors to prevent internal equity issues. This may, in turn, result in equity problems with other job classifications.

• OPTION 2. Leave current salaries as-is. Make all supervisors earning less than $47,476 non-exempt, and retain all supervisors earning $47,476 and above at their current exempt status. Supervisors who are made non-exempt will earn overtime, but will not be eligible for increased vacation time or quarterly bonuses. Supervisors remaining exempt will remain eligible for increased vacation and quarterly bonuses.

  • Paying 8 hours’ overtime at 1.5 current hourly rates every other week for the employees making less than $47,476 will result in increased payroll costs of $1,506,600 per year (first year).

  • This will cause administrative challenges, since there will be two sets of pay ranges and pay rules/practices for one group of employees.

  • If production supervisors receive increases (e.g. annual merit increase) that put them above the $47,476 threshold, they will need to be transitioned to the “exempt” set of policies and practices.

  • Based on focus groups and employee conversations, you anticipate dissatisfaction from those supervisors who lose their exempt status due to the decreased flexibility and perception of being “demoted” to an hourly position (and being required to track their hours).

• OPTION 3. Leave current salaries as-is, but make ALL production supervisors non-exempt (e.g. treat them as non-exempt and pay overtime, even though not required to do so for those making over $47,476).

  • The increased annual payroll costs associated with paying overtime to all supervisors is $11,506,600 (first year). This is based on the built-in overtime associated with the production schedule.

• OPTION 4. The company could choose to eliminate the 12-hour rotating shifts. However, this would result in the need to build and staff additional facilities to compensate for the lost production. This option is estimated to cost upwards of $105,000,000 for the new facilities plus the cost of new employees for the new locations. This option will not be considered.

As you weigh these alternatives, you must also keep in mind that how you handle this group of employees will impact how you handle other employee populations similarly situated. Will the company be consistent in how it handles job classifications/pay ranges that span the new non-exempt minimum pay threshold? Will the company, in general, choose to pay overtime or to increase pay for employees to maintain their exempt status and avoid the overtime?

Additionally, the FLSA rules state that the minimum salary for the exemption will increase regularly. The next increase, which will occur in 2019, is projected to move the minimum salary to around $51,000. Decisions you make now will impact how you handle these subsequent increases

Case Questions

Provide thorough, well-developed responses to the following questions.

1. Discuss the level of importance that each of the following considerations will have in making a decision regarding how to proceed: Cost; Administrative Challenges; Internal Equity; Employee Satisfaction.

All of these options bring their own challenges and risks for employee dissatisfaction. Cost is quite different for each of the options, though cost can’t be the only option that you consider. I believe that option #1 and #2 could lead to a host of potential employee issues. You can, but often shouldn’t raise wages on the lower half without raising wages across the board (option #1). Also, administratively you would want to have the whole set of employees on the same pay structure rather than the suggestion in option #2.

Importance begins at meeting the requirements of the law and maintaining internal equity. Then cost and considering administrative challenges are next on the list. And finally, employee satisfaction. There will always be someone unhappy with the change. The goal is to maintain equity and satisfy the majority, while meeting the needs/requirements of the company.

https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/updating-salary-structure.aspx

2. Given all the variables involved, make a recommendation regarding how to proceed. Discuss the pros and cons of what you propose and develop recommendations for dealing with any potential difficulties.

I would suggest option #3. While high in labor costs, the overall labor schedule may be able to be adjusted to reduce the costs. While the flexibility of carrying over hours is great, administratively it could be a burden that is relived and may reduce costs. This option also creates a more equitable salary situation for workers. It reduces the likelihood that this issue will have to be revisited in the future when/if the salary basis changes. It also accounts for all overtime the company is required to pay out, which under the current plan is not happening for the 12 hour shift employees.

Employees who are used to earning banked time off will likely be upset. However, if framed to employees in the right way, they may be swayed to see that this change can benefit them.

3. For employees in job classifications with more traditional schedules (e.g. M-F 9-5, not the 12-hour rotating shift), the company has similar options. For these employees, however, who do not have overtime built into their schedules, it may be possible to restrict hours worked and eliminate overtime. Given this additional option for this group of employees, would your recommendation change? Discuss your recommendation for these employees and explain your reasoning.

My recommendation would not change. I would still opt to change everyone to hourly and adjust the production schedule or, in this case, limit hours and overtime to reduce labor costs. Hiring additional employees or changing the scheduled hours can reduce labor costs by eliminating overtime pay. Some production jobs hire temporary workers when production is high and lay them off or end their employment when production drops. Construction and manufacturers are some employers who practice this type of temporary work.

4. As an additional “wrinkle”, you just became aware that your company is considering building a new location in California. This would be your first manufacturing location in California. You know that states can have their own overtime provisions that are more stringent than federal law. You seem to recall that California has its own overtime provision that may impact your organization’s preference for 12-hour manufacturing shifts.

California sets the workday to be 8 hours per day and 40 hours per week. In this case, workers who work a 12-hour shift would require the company to pay time-and-a-half for all hours past the 8-hour mark. Also, employees cannot work more than 6 days in a row. On day seven, the entire 8-hour shift must be paid in overtime.

This would require the company to change hours, at least for the California branch. They would not want to maintain the 12 hours shifts with all that overtime. This would be a good time to make changes company-wide to ensure internal equity.