How Will the New Overtime Laws Affect Your Business and How Can You Prepare?
By Jana Aristizabal - Senior Manager, Tax & Business
In 2014, President Obama directed the Secretary of Labor to update the overtime regulations to more accurately reflect the original intent of the Fair Labor Standards Act, of providing fair compensation to employees. On December 1, 2016, the Final Rule (also known as the “Overtime Rule”) will become effective. The update defining the exemptions for Executive, Administrative Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act (FLSA) provides clarity for professional exemption and simplification in the identification of overtime exempt employees, and ensures that the FLSA’s intended overtime protections are fully implemented. This new regulation is estimated to impact more than 4.2 million workers and consequently their employers.
Currently, salaried employees with some managerial duties who earn between $23,660 and $47,476 are exempt from earning overtime pay. However upon implementation of the Final Rule, employees who receive compensation of $47,476 annually, or less, will be reclassified as “non-exempt.” After December 1 of 2016, these employees must be compensated for time worked over 40 hours per week.
The Department of Labor set the new weekly earnings threshold for full-time salaried workers using the census wage reporting data. The change raises the salary level from its previous amount of $455 per week ($23,660 per year) to the new level of $913 per week ($47,476 per year). The increase in exempt wages has not been updated since 2004 and before that, not since 1975. Therefore, the change was long overdue. Going forward, there is a provision that allows for an automatic adjustment to the salary limits every three years.
It is important to note that the Final Rule does not include any changes to the duties test or defining employees under white collar exemption, which also affects the determination of who is exempt from overtime. These rules remain unchanged from prior years.
When the question was proposed to the Department of Labor about the determining factors for an employee to fall within one of the white collar exemptions, the answer was as follows (summary):
“To qualify for exemption, a white collar employee generally must:
- Be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
- Be paid more than a specified weekly salary level, which is $913 per week (the equivalent of $47,476 annually for a full-year worker) under this Final Rule (the “salary level test”); and
- Primarily perform executive, administrative, or professional duties, as defined in the Department’s regulations (the “duties test”).
Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers). The Department’s regulations also provide an exemption for certain highly compensated employees (“HCE”) who earn above a higher total annual compensation level ($134,004 under this Final Rule) and satisfy a minimal duties test. “
Although the FLSA provides minimum wage and hour standards, it does not prevent a state from establishing more protective standards. If a state establishes a more protective standard than the provisions of the FLSA, the higher standard will apply in that state.
So how can you prepare for this change? The new law is effective December 1, 2016. Marcum is recommending that clients to use this time to review your records and identify those employees who will be affected by the change. Identify your exposure, quantify the costs and then explore your options. Use this time to review job descriptions for employees and update these if needed. Don’t assume a salaried employee is exempt by the nature of their salaried pay. Once you review your records you can identify the financial impact of the new law and determine the best path for your business needs.
Some possible planning options would be to increase the salary of an employee who is close to the new threshold, so as to maintain their exemption. Evaluate and realign work schedules to eliminate or avoid overtime for those employees. These options can be explored further once you have reviewed your records and employees’ history and know where your exposure lies. When considering changes to your employees’ pay and benefits, it is important to take into consideration the financial and non-financial sides of any proposed employee changes. Reducing hours and work schedules needs also to make sense for your business operation in addition to your bottom line.
Many business owners are concerned that with more employees falling under the overtime threshold, the record-keeping required will become a burden. Although the FLSA requires that employers keep certain records to support payroll and overtime requirements, it is up to the employer to choose the method that works best for the business. There is no requirement for an employee to “punch a time card,” and employers have flexibility in designing their systems to track employee hours worked each day.
The change in the “Overtime” final rule will have a significant impact on employees and employers, alike, and should not be overlooked. All employers should be reviewing their employment records and consulting with professionals who can assist the planning and implementation of the change in the law.