Non-exempt does not mean hourly, it means overtime must be paid. Please repeat this three times.
One more time, Non-exempt does not mean hourly, it means overtime must be paid. Far too many people mistakenly equate non-exempt positions with therefore being legally mandated as hourly. This is not the law.
One of the vexing problems which confront many businesses is how to develop compensation systems which get both the employee and the company of the same page and rewards the employee for productivity. For exempt employees (those who are not legally entitled to overtime pay) there are many options. In fact in many situations, the problems with exempt employee’s compensation systems are that the company attempts to use the compensation system to replace the actual management of these employees. No compensation system can do this. As noted above, at best a compensation system should get everyone on the same page (what’s important, what we want you to focus on, results we desire) and reward the employee for productivity. That’s it. Nothing more. Nothing less. You still have to actively manage the employee.
But for non-exempt employees the issue has been more murky. The easiest path for non-exempt employees is to simply pay them an hourly wage and pay overtime as 1.5 times this amount.
As an example, Employee A works in the warehouse and we target this position to make $30K per year (that’s the auction price the marketplace puts on the skills this position requires). Therefore we pay this position $15/hour (our first mistake since we haven’t included our estimate of overtime in this pay rate; therefore this employee is most likely going to make more than our $30K W-2 target). But for now we’ll ignore this mistake
If they work 60 hours in a single week and are paid $15.00 per hour, they make:
40 hours times $15.00 = $600
20 overtime hours times $22.50 ($15.00 X 1.5) = $450
Total weekly pay = $1,050
But what if we used another measurement of work rather than simple hours? To begin with, paying for hours worked is somewhat mistaken in the first place. Do we really compensate people for simply selling us a few hours? Or do we in reality compensate people for accomplishing tasks? I don’t think you’d want to pay employees “for their hours” if all they accomplished was eating a few donuts and chatting on the phone to friends. No, you pay them for accomplishing things and often use hours worked as a very rough metric on what they hopefully accomplished. Here’s a thought… why not simply pay them directly for accomplishing these tasks? And then pay any required overtime as a half-time premium on this.
In this manner you don’t pay for hours but rather calculate their effective hourly rate and then pay half of this for all overtime hours. This could be used in any area of your business; warehouse, delivery, sales, office, shop… everywhere. You simply have to determine the relative metrics to use in each situation… cases delivered, cases loaded, orders built, product received, lawns mowed, files filed, whatever.
It’s not remotely as complicated as it may sound. Let’s go back to the employee used in the example above and add a co-worker (sadly a slacker). Assume we have developed some productivity-based measurement and on average target this to $600/week (still shooting for our $30K W-2 earnings… and still ignoring the fact that we have forgotten to include the impact of overtime in our target)
Employee A –
Performance-based weekly earnings = $600
60 hours worked to accomplish these tasks
Effective hourly rate = $10/hour ($600 in performance earnings divided by total hours worked, 60 hours)
Half time premium for overtime calculation = $5.00/hour (one half of the effective hourly rate $10/2)
Net overtime hours = 20
Overtime pay = $100 ($5 times 20 hours)
Net weekly earnings = $700 (performance base plus overtime premium)
Employee B – our friendly slacker
Performance-based weekly earnings = $600
80 hours worked to accomplish these tasks
Effective hourly rate = $7.5/hour ($600 in performance earnings divided by total hours worked, 80 hours)
Half time premium for overtime calculation = $3.75/hour (one half of the effective hourly rate $7.5/2)
Net overtime hours = 40
Overtime pay = $150 ($3.75 times 40 hours)
Net weekly earnings = $750 (performance base plus overtime premium)
In this example, the slacker only makes an extra $50 by taking an additional 20 hours to accomplish the same job. Assuming the same tasks are accomplished by each employee, the more hours it takes to do the same job, the less the overtime premium becomes. This gives employees the incentive to get the job done as quickly as is possible. It gets employees and employers on the same page regarding productivity… something that paying hourly can never accomplish. Comparing the hourly employee’s weekly earnings, $1,050 with Employee A’s weekly earnings, $700, shows the impact of discarding the simplistic motion of hourly pay.
For those wondering, delivery drivers are generally exempt from paying overtime due to an obscure, but relevant law from the 1930’s. But it depends. As an example, if you are a Florida A-B wholesaler and you pull most of your product from an in-state brewery, your drivers probably are not exempt - but remember, as with most laws there are gray areas. It just depends how much you want to push the envelope. If you are the same Florida A-B wholesaler’s Coors/Miller competitor, your drivers most likely are exempt. The importance of moving material over state lines is the key here. Since I don’t practice law, I’ll let you contact your labor attorneys for further clarification (or give me a call or email and we can discuss in more detail). Paying on productivity also can change the entire way employees look at work. If I pay my drivers a cents per case commission, they see a full truck as a hefty paycheck. If I pay them hourly, they are more inclined to see that full truck as a pain the behind. The same is true for all volume-based activity. And of course sales is generally an exempt position (although not always).
You may find that you will also want to add a base pay component to this performance based system. You might need a base(s) to balance out earnings potential and/or to adjust for seasonality. Remember that it doesn’t matter what an employee’s W-2 reads at the end of the year. If they can’t make their rent payment in your slow months, you will lose employees. Use a base to help limit these swings. If you do need a base, pay it as a daily base and not a weekly base. This is not a huge deal (and only a matter of how we word it), but if you state it is a weekly base, then if an employee works any part of a week, they must be paid this full weekly base. You can’t “pro-rate” it. Not your choice. Therefore refer to it as a daily base to solve this problem. But as a daily base the same concept still holds… if they work any part of a day, they must be paid the full daily base. If you do add a base, it is included (with the performance pay) in the calculation of effective hourly rate.
Also remember, anytime you touch employee’s pay it is a sensitive topic. But we are SALES people. Sell these concepts, don’t just throw them out there and assume your employees will figure out why they are not getting screwed. (and yes, any time anything changes, many people assume they are somehow getting screwed in the process… unless it is clearly and honestly explained… and even then many will doubt until they actually live the results for a while). Sell these concepts to your people. Let them know why you are making the changes. Show them how these changes allow them to make more money by rewarding their productivity. If I have a driver (or whoever) who can do his full job in less time, I say god bless him. Let us reward him for this by either giving him the opportunity to make more money, or to effectively impact his hourly earnings (maybe he’d rather go fishing than earn more money… nothing wrong with that).
Also remember that ultimately we don’t determine what we pay our employees, the marketplace does. It determines the market price for the set of skills the position(s) require. Exactly like an auction (since that is ultimately what it is), you can always over-pay for any position. But you cannot consistently under-pay. Can’t be done. You may get “lucky” with an employee or two but I challenge anyone to staff an entire company by paying less than market price. I often hear complaints from wholesalers who can’t keep a good receptionist (or drivers, or warehouse personnel, etc), and generally my first response is perhaps you need to pay more for the position (also never forget the impact of poor management but that’s a post for another day).
Perhaps the marketplace is telling you the market price for the skills you desire (regularly showing up to work on time, showing up sober, etc.), is higher than what you are offering. Often the wholesaler response to my suggestion is that they can’t pay more. I laugh and tell them, no, they can pay more, they just don’t want to. But what we want doesn’t change anything. Would you go to your local antique auction and consistently under-bid for products and then complain that you can never purchase what you want? Then why do you think you can do it in the marketplace for employees?
Don’t look at these compensation system adjustments as methods to take money from your employee’s compensation (the marketplace sets these limits anyhow and fighting the marketplace is a fool’s errand). Instead look at them as ways to better align the employee’s and employer’s interests and to reward those employees who bring more to the table. Handled properly, it can have a profoundly positive effect on your corporate culture, driving a performance-based culture… today and tomorrow.