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IBM Responds to FLSA Suit by Cutting Base Pay for 6% of Workforce....

Here's an ugly one for you....

In 2006, IBM got hammered in a FLSA suit, and was ordered to pay 65 million in unpaid, overtime, back payIbm to workers included in the suit, who were deemed to be incorrectly classified as "exempt".

With that in mind, you expect a company like IBM to reclassify those employees as non-exempt and start making them OT eligible, right?   

As expected, the good news for those workers is that IBM now plans to grant them non-exempt status so they can collect overtime pay.

The bad news: IBM will cut their base salaries by 15% to make up the difference.

IBM's taking this path with 6% of its total workforce...

In a move that is legal but full of employee relations potholes, IBM apparently looked at the entire situation, and decided to remain cost neutral by cutting base pay of the workers upon the transition.  That way, if the expected amount of OT comes in, the workers will be earning the same total compensation.

That's hardball from a compensation perspective.  Glad I'm not the HR Manager handling those conversations - "Ricky, we're moving you to hourly/non-exempt status.  As a part of that, we've taken your salary and converted it to an hourly rate, then reduced it by 15%, since that's the average amount of compensation we project you'll earn through overtime this year".



Jon Hyman

Let me offer a different perspective, based on an employee’s and employer’s expectations. Let’s say someone is hired and told, “We are going to pay you $60,000 a year.” So, twice a month, the employer expects to cut a check for $2,500 and the employee expects to receive a check for that amount. Now, let’s say the Department of Labor comes in and says, “No, no, that is a non-exempt position. You have to pay that employee overtime.” Why should that change the fact that the employee still expects to earn $60,000 per year? The employee is doing the same exact work, and should expect the same pay. The only thing that has changed is the Department of Labor’s opinion on an exemption. But that determination should have no effect on the employee’s salary expectation. So, if an employer wants to figure out what hourly rate, coupled with an average amount of overtime, will get an employee to the expected $60,000 per year, where’s the harm? If the employee’s expectation at the outset of employment is $60,000, why should the employee earn anymore if the job has not changed at all.

I'll change the hypothetical to further illustrate my point. Take the same employee making $2,500 a week. If that employee works 50 hours a week, that employee’s hourly rate is $50. So, now because that employee is non-exempt, the employee is owed an extra $250 that pay period ($25 overtime premium * 10 hours). Over the course of a year, that equates to an extra $6,000. So, now the employee who expects to make $60,000 that year, will make $66,000. Where is the harm in figuring out what hourly rate will get an employee to that $60,000 number? There’s no nasty surprise if everyone’s expectations are met.

Ann Bares


Technically, you're right of course - and the alternate perspective you present is a logical one. But I still agree with Kris that the communication and roll-out of this would have to be a pretty delicate dance. "Fixed" salary dollars don't necessarily equate to dollars that result from a combination of hourly rate and overtime pay (just like exchanging salary dollars for incentive opportunity dollars is not an even exchange)- and employees know this.

Regardless, it will be interesting to see how this plays out. Kris - hope you'll keep us posted!

Michael Haberman, SPHR

Well they did not have to change them to hourly employees just by changing them to non-exempt. They can still be paid a salary, a much less demeaning prospect to most employees, and then be paid overtime on a flucuating workweek schedule. That reduces the amount of compensation paid out to half-time and discourages working unnecessary overtime. So there was a half-way point that might have been more palatable to both parties and the DOL.


Jon -

I'm cool with the perspective, but I'll build on what Ann said. The biggest issue I see with the expectations of employees is that most places allow salaried employees to develop an expectation that they'll work a 40 hour week, rather than working until their objectives are met.

This fundamental weakness in performance management/expectations leads to increased employee issues when making the move to hourly. If employees are allowed to think that they're being paid a salary for a 40 work week, they are sure going to think they deserve OT pay above and beyond the equalized hourly rate. It's a very, very tough message.

Mike - great point on the demeaning aspect to employees. I've seen employees actually be upset to be reclassified as hourly, because they thought they had arrived when they made it to exempt status. Got a link to the other part of your post? In most of the companies I've worked for, comp people like Ann have never offered that option to me....


You guys neglected to mention one thing that IBM told its employees -- they have to be "approved" before they are allowed to work overtime. And that means, that when push comes to shove at the end of a quarter or the end of the year, when cost-cutting is at its best, IBM will say "no more overtime" in order to pay out less in salary and look better to their stockholders. I would say that most people will be getting paid less after this change than before.

Does this also mean that when someone is promoted from non-exempt to exempt status, they will get a 17.6% raise? That's what it would take to reverse the 15% pay cut. And I highly doubt that would ever happen.

mike g

cough.... cough.....
The reality of the situation is that those who took the pay cut are being told that they are NOT allowed to work overtime.

Edmund Burke

This mess is Karma on overdrive.

It used to be that white collar meant professional. It meant, suck it up. There is an opportunity cost for everything.

But lo and behold, in the latter day, the whiner contacted the slip and fall litigator. Yeah man, I'm gonna stick it to the man, man! Hmmm ... neither professional nor honorable, me thinks.

So, the slip and fall litigator incited the rising populist and anti capitalist wrath of the permanently angry.

And so, politics happened.

The law came, and, "the man" did what he had to do.

A sad lesson for the whiners who never should have been white collar in the first place. And ever sadder for those few and proud white collars who were perfect for white collar, who never complained, and liked things the way they were. Now, all are pulled down. Leveling at its worst. How positively Communist.

And that's how, um, "stuff" happens.

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