Jordan WanUPDATE – Aug 31, 2017: A federal district court in Texas struck down the 2016 overtime rule. More info here.
What’s happening?
On December 1st 2016, the updated Fair Labor Standards Act (“FLSA”) will change the Overtime Rule so that the minimum base salary test is now $47,476 for exempt workers.
Practically speaking, if you have SDR’s making less than $47,476 in base salary, your options are:
- Limit their hours to 40 per week (probably unlikely at a startup!)
- Allow them to work more than 40 hours per week but pay them time-and-a-half for overtime hours.
- Classify them as exempt workers — which requires the following:
- Salary Level: Annual salary is at least $47,476.
- Salary Basis: Base salary is not subject to reduction based on quality or quantity of work (ex. someone paid on an hourly basis).
- Standard Duties: primary job duty associated with exempt executive, administrative, professional employees, computer employee or outside sales. View details here on which exemption is most applicable for your SDR’s.
Other corner cases for startup sales
- The 10% rule: The minimum salary level for exemption does allow up to 10% to be in the form of a non-discretionary bonus or commissions (ie. $42,744 minimum). The bonus or commissions must be paid out at least quarterly. With this option you can plan on providing at least a 10% guaranteed bonus or commission. Otherwise you will have to pay additional salary to make up the difference. Or you could reclassify the employee as a non-exempt employee for that period of time and pay overtime for any overtime hours worked.
- Co-founders and and business owners: Business owners (ie. startup co-founders) who have at least 20% equity stake in company and are part of the management team are exempt from this minimum annual salary. Details on this here.
How you should position this to your team?
Your sales team may think this means they are entitled to a raise in base salary. While this may end up being the case mechanically, it’s really just a shift from variable to guaranteed income for employees who are working more than 40 hours week. This is a better way of communicating the change than an increase in total earnings.
It may also be helpful to explain that for the long term health of the company, it’s important to keep profit margins healthy. Therefore, an adjustment to the variable component of their compensation plan is necessary to keep the cost of sales the same.
How can it work if I want to go non-exempt status?
In some cases where your sales role has very defined business hours, it may be fine to claim non-exempt status. A word of caution though if you have multiple sales teams. It hurts team culture if some sales teams are on a strict 40 hour work week while others are exempt workers and expected to work more than 40 hours a week.
But let’s assume you’ve decided to go the non-exempt route. Assuming a $40k base, you could do the following:
1) Limit hours to 40 per week
The hourly rate would be $40,000 / (52 weeks x 40 hours) = $19.23 per hour. You would need to keep very detailed records as specified by the Department of Labor.
2) Factor overtime hours into hourly rate.
Let’s say that you estimate weekly hours to be 45 hours per week. In this case, you can still keep the effective annual salary at roughly $40,000 by factoring in that 5 hours a week will be paid at time-and-a-half. You would have to lower hourly rate to $16.45 such that: (52 weeks x 40 hours x $16.20) = $33,696 and (52 weeks x 5 hours x $16.20 x 1.5) = $6,318 for a total of $40,014 per year. Note that you still have to keep very detailed time records and be responsible for any overtime pay above the projected weekly hours.
If I want to claim exempt status, how should I alter my SDR comp plan?
As an example, let’s suppose your original SDR comp plan was a $40k base and $100 per qualified meeting set for an OTE of $64k (assuming target is 20 qualified meetings set per month).
If you want to keep cost of sale relatively constant, there are two simple ways to offset the increase in base salary.
1) Reduce commission rate schedule.
Keep on-target-earnings (OTE) the same and just lower the commission schedule without limiting the upside. Since variable is always riskier, we’d recommend a smoother transition by using conservative calculations such that the OTE is slightly higher than before. You can for example increase base to $48k and reduce per qualified meeting held to $70 per for a new OTE of $64.8k. The OTE is slightly higher but the expectations are same as before.
2) Create a minimum performance threshold before commissions are paid.
This is probably the cleanest and simplest change as you won’t have to alter the commission schedule itself. Suppose you increase the base from $40k to $48k. This is effectively a pre-payment of 80 meetings on the year or first 7 meetings of each month. While it can be discouraging to your SDR’s to not receive commission on meetings they did before, just remind them all you are doing is pre-paying. If you can keep a monthly cadence on paying commissions in excess of the minimum performance of 7 meetings, that also lessens the blow.
For more information on the new overtime rule
- Overview video and homepage from Department of Labor on the Overtime Rule.
- Department of Labor’s official guide for private employers to stay compliant.
Disclaimer: All information provided by this post is for informational purposes only. This is a high level overview of an important labor law change and should not be taken as legal advice. CloserIQ makes no claims as to the accuracy or validity of this information and will not be liable for any damages resulting from its use. We encourage you to find legal counsel for how this directly impacts your business before taking any action.
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