Sep. 20th, 2016

Spotlight: New Overtime Rules – What you Need to Know

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By Richard L. Chrisman, CPA, MST – Managing Shareholder

How many exempt employees work in your office, company or organization?  These are employees who are paid a salary, and no matter how many hours they work, they are not eligible for overtime pay.  Regardless of your answer, this number may change in December.

Exempt or Non-Exempt?

Unless determined to be exempt from the overtime rules, employees must receive pay for hours worked in excess of 40 a week.  The overtime is paid at a rate of not less than one and a half of their regular pay rate. The employers are also liable for the payroll taxes.

There are two tests used to determine if an employee is exempt from the overtime rules:

  1. The “wage threshold test” discussed below and
  2. A “duties test” that looks at what the employee’s job responsibilities are. If they primarily perform executive, administrative, or professional duties, they may be deemed exempt. Of course, it’s more complicated than that. So there are regulations that spell out the criteria in greater detail.

New Rules

The Department of Labor has come out with new overtime rules that take effect on December 1, 2016. The rules will raise the salary level that is used in the “wage threshold test.”  Under the new rule, the salary level is more than doubling from today’s $23,660 ($455 per week) to $47,476 ($913 per week).  In the future, the limit will be adjusted every three years beginning on January 1, 2020.

The wage threshold for the highly compensated also went up — from $100,000 to $134,004.

What You Need to Know

The results of these changes are as follows:

  • Employees that earn a salary of less than $47,476 are non-exempt and are entitled to overtime pay (regardless of what their job responsibilities are).
  • Employees that earn more than $134,004 are exempt, and are not entitled to overtime pay (regardless of what their job responsibilities are).
  • Employees that earn between $47,476 and $134,004 may or may not be eligible for overtime pay, with the determining factor being their job responsibilities (the “duties test”).

Assess the Impact of the Changes

Salaried employees that just became eligible for overtime pay because of the rule changes will not need to be switched to being paid hourly or to punch a time clock. However, it will be important to track their time to ensure that:

  • The hours don’t exceed 40 a week, or
  • That overtime pay is paid when earned.

Here are some immediate steps to consider in response to the new rules. Start by answering these questions:

  • How many of your employees will be classified as non-exempt under the new rules?
  • How many of them routinely work more than 40 hours a week?
  • What would it cost you if they continue to work more than 40 hours per week and are eligible for overtime?
  • What systems do you need to put in place to monitor employees’ hours after the new rules go into effect?

Once you get a basic handle on this information, other questions to consider include:

  • Should we hire part-time people to keep the non-exempt employees from having to exceed 40 hours a week?
  • Will it be more economical to give raises to employees who are currently earning less than $47,467 to get them to the exempt level and avoid having to track their hours and pay them overtime?
  • Can we reduce or eliminate overtime hours?
  • Can we adjust the salaries or wages of employees who will become entitled to overtime pay so that, when they earn overtime pay, they will end up earning the same amount as they did before?
  • Can we make adjustments to our employee benefits program to offset the rise in payroll cost?

There are no easy answers to these questions. Each possible response raises its own set of issues.

Your Employees Are Talking About It

It’s a safe bet that your employees will have heard about the impending rule change, and they’ll be looking to you for answers about how it will affect them. For most employers, it’s probably wise to begin engaging employees on the topic, even if you haven’t mapped out the details of how you will respond. An honest “we’re figuring this out” answer can be better than silence.

If you need additional information on the final rules, we can help.

 

Richard L. Chrisman, CPA, MST is the Managing Shareholder of Hungerford Nichols CPAs + Advisors, a Tax, Auditing and Business Consulting firm with offices in Grand Rapids and Greenville, MI. The firm is celebrating 75 years of helping local businesses.