By Susan Prince, JD, M.S.L., Legal Editor

In light of the Department of Labor’s (DOL) final overtime regulations under the Fair Labor Standards Act (FLSA), a formal compensation administration program is an important management tool for ensuring that employees are satisfied, that both internal and external equity are maintained, and that control is maintained over compensation costs and the allocation of overtime hours. Establishing an effective compensation administration program requires job analysis, job evaluation, and job pricing.

The DOL’s final overtime regulations have increased the salary level required for exemption from overtime to an annual salary of $47,476, up from the current threshold of $23,660 annually. This translates to a weekly salary of $913. This means that your employees who currently earn more than $455 per week, but less than $913 per week, must be reclassified as nonexempt by December 1, 2016 and will be entitled to overtime for any hours worked over 40 in a week.

Job analysis and the new regulations

Prior to this transition, each job in your organization potentially affected by the new regulations should be thoroughly analyzed and described. Accurate job descriptions provide a basis for job evaluation, wage and salary comparisons, and an equitable wage and salary structure. Many job descriptions contain the following seven elements:

1. Job identification/position summary,
2. Essential functions,
3. Skills,
4. Knowledge,
5. Attributes,
6. Experience and education, and
7. Physical and environmental conditions. 

This framework may vary from employer to employer and from job to job. One important thing to remember is that all job descriptions within an organization should follow the same rules for application of a particular format. Those individuals responsible for writing them should receive similar instructions and follow the same guidelines so that valid comparisons can be made among jobs.

Job descriptions are not required under the Americans with Disabilities Act (ADA), but for most employers, detailing the essential functions in a job description will help ensure that applicants and employees with disabilities are not discriminated against because they cannot perform marginal job duties.

Employers should note that a job title alone is insufficient to establish the exempt status of an employee. Instead, the status of an employee must be determined on the basis of whether the employee's salary and duties meet the requirements of the changing regulations.

If your company has not updated its job descriptions in over a year, it is possible that the actual work performed by employees under your current job titles has changed. Therefore, you may want to confer with managers, supervisors, and the employees when updating job descriptions.

Once you have job descriptions that you believe accurately reflect the jobs performed, have your legal advisor review them, and sign and date the review so that you can prove your job descriptions are up to date and determine when a new review is necessary.

Job evaluation

Job evaluation determines what jobs are worth on an absolute basis and relative to other jobs in the organization. It can be done in a variety of ways, but usually involves assigning “points” based on complexity, impact, budget, supervisory duties, and so on, and attaching job ranks based on the total number of points. Jobs that are of greater value to the organization have a higher labor grade; jobs of lesser value fill the lower grades.

Job pricing

What an employer has as a result of the job evaluation program is a hierarchy of jobs based on point values (or some other set of reliable criteria.) In other words, an employer can be assured of internal equity when it comes to matching up the various evaluation "scores" with actual wage levels because all of the jobs in the organization have been compared with each other and have been evaluated accordingly. But internal equity alone can't guarantee employee satisfaction or protect a firm from a legal challenge.

An employer must be aware of what other firms in the area or industry are paying for similar jobs. Once this information has been obtained and an employer has determined that the wage and salary structure compares favorably, an employer has achieved external equity as well.

Job pricing involves establishing rate ranges; that is, minimum, midpoint, and maximum dollar values for each labor grade. By studying wage and salary surveys, employers can compare wages in the labor market to the jobs within their organization.

The result is a scale of wages that allows the employer to compete in the labor market (external equity) while ensuring that jobs that are worth more to the organization are paid more than those of lesser worth (internal equity).

Here's an illustration of a set of rate ranges. Note that some jobs fall below, and some above, the overtime exemption salary threshold of $47,476 per year.

With the salary threshold for exemption falling at $47,476 effective December 1, 2016, eligibility for overtime will be a consideration in your job pricing for 2017. Furthermore, the DOL will automatically update the standard salary and compensation levels every 3 years going forward.

The DOL has set the salary level at the 40th percentile of full-time salaried workers in the lowest income region in the country, which is currently the South. The DOL states that based on projections of wage growth, the threshold should rise to over $51,000 by January 1, 2020, which will be the date of the first increase. Your job pricing will need to take this into consideration every 3 years in order to avoid unanticipated increases in overtime costs.

Job analysis, evaluation, and pricing to reduce overall costs

On December 1, 2016, a number of your employees will transition from an exempt to nonexempt classification because of the increased salary threshold. You can minimize the costs you will incur in the transition of employees with some adept job analysis, job evaluation, and job pricing.

For example, after your job evaluation, you may decide to increase the salaries of a group of employees to place them in the exempt category in order to avoid paying overtime. On the other hand, you may reclassify the affected employees as nonexempt, but limit their overtime hours.

You can always hire part-time workers or temporary employees to offset the reduced workload of employees who are no longer working more than 40 hours per week. Your job analysis, evaluation, and pricing efforts now will help you reduce your overall costs in the long run.

Additional resources

• Article: Only 15% of U.S. workers in careers with growth, says survey
• Guidance: Designing Base Pay
• Forms: Job Analysis Information Sheet