As the coronavirus pandemic continues to plod along, professional service and project-based companies are taking stock for the long term. It’s clear that the new normal is likely to extend through the fourth quarter of the year and into 2021 — at the very least. That has specific billing and payroll implications for the professional services sector, as they manage billable and non-billable time — as well as salary allocation across projects.
As your organization enters the fourth quarter of the year, you’ll have some important payroll decisions to make for the next year. You may have to rethink your current payroll model and consider options that you’ve never thought about before. You’ll also need to consider whether any changes will be permanent or only for the duration of the coronavirus period.
IDI has many similarities to a professional services company, and these are the kinds of things we’re thinking about as we look to the future. Let’s explore the payroll issues that your leadership team will need to address this quarter as you prepare for 2021.
Evaluate Salary Threshold Increases
Right from the start of the year, payroll got hit with a big change — even before the coronavirus. The Department of Labor implemented salary threshold changes that impacted project-based businesses across the country.
Here’s a quick review. On January 1, 2020, the salary threshold for executive, administrative, and professional overtime exemptions under the federal Fair Labor Standards Act (FLSA) increased from $23,660 ($455 per week) to $35,568 ($684 per week). Anyone earning a salary at or below the threshold must now be treated as an hourly employee for overtime, at non-exempt status.
Most professional service companies worked through the calculations to determine the best financial outcome — whether to issue raises so that all employees maintained a salaried classification, or to reclassify employees who were under the threshold to hourly. Reclassifying would make your organization subject to FLSA compliance for overtime.
With the advent of the coronavirus, all expectations for revenue and profits may have been thrown out the window, or you may not have had time to take stock before the coronavirus disruption. As a result, now may be a good time to reevaluate the classification of your employees.
Take a Second Look at Your Incentives
Keeping your best people is always a top-of-mind consideration. During COVID-19, if you have to do more with less, you want to be doing it with your best people. Bonuses and commissions are often effective ways to do that.
As you review your bonuses and commissions, consider what sort of incentives you currently have in place. Are you confident that you’re in compliance with applicable labor laws — specifically FLSA?
With salaried employees, you give a bonus and it’s paid on the top. It’s very simple. But when it comes to hourly employees, you have to make sure the bonus is assigned to the right pay period (including prior periods) and that overtime is calculated correctly in that period. A $500 bonus to an hourly person is treated much differently from a $500 bonus to a salaried person, because of the overtime dimension.
Audit Your Project Profitability
We’re working with some project-based companies who have heard customers say, “These seem like pre-COVID rates that you’re charging us. We want the COVID rate.” In other words, customers are expecting discounts. They don’t have the money, and they expect you to understand that in a competitive landscape you’ll need to be more willing to cut pricing.
If you’re doing billable hours at specific rates, and you’re being asked to take a haircut on that rate to account for a pandemic, you need to know that you’re still profitable against your labor, benefits, and other costs.
Make sure you’re properly tracking billable and non-billable hours to know for sure whether or not you’re profitable on projects. If your project managers are billed out at $100 per hour and service level staff are billed out at $50 per hour, does that give you the profitability you need?
Many project-based companies don’t know their actual margins — they guesstimate them. But the new normal demands that you audit the true costs of labor and benefits against what you’re billing out at — especially if your rates have changed during the pandemic.
Even if you know your actual margins during normal business, you may need to go back and check them again. Even something as simple as virtual work can throw off your margins. The move to virtual — while it saves on travel dollars and travel time — can adds inefficiencies and delays.
For example, in a virtual meeting, people may be multitasking and they may not be fully engaged. That can extend projects and introduce other challenges that aren’t present when you’re in the room working on a whiteboard and knocking out items with your client.
During Q4, scrutinize your numbers and true costs during the coronavirus period. The projects that you modeled out a few years ago might not fit with the way you’re working now. You may need to redo your models to know your costs accurately.
Reevaluate Your Pay Period Model
If you’ve classified some employees as hourly, you may be making payroll harder than it needs to be. Using a semi-monthly or monthly payroll cycle introduces complexities that you can avoid if you switch to weekly or biweekly.
When you pay on the 1st and 15th day of the month, you often need to do some calculation gymnastics around getting the overtime rate correct. Because payday doesn’t always line up with the end of the week, you won’t know the correct overtime until the next pay period, which means you’ll need to provide back pay.
If you have hourly employees, you may want to take a hard look at paying weekly or biweekly to make overtime calculations easier. But if you’re convinced that you want to stay semi-monthly for business reasons, be aware of what it takes to be in compliance for overtime pay.
Start the Next Year Strong
As we enter the final quarter of 2020 and begin making projections for 2021, professional services organizations will need to deal with the reality that the new normal of the pandemic will be a long term reality. This means reevaluating payroll practices and finding ways to stay profitable through the coronavirus.
As you draw on the expertise of third-party resources, we hope you’ll consider IDI. Whether or not you’re a client of ours, we’re here to help you navigate the payroll complexities that you’re facing. We have decades of experience at our disposal, and our team of experts is here to help you make smart decisions with confidence.