By Jeff Foley, CPA, Gray, Gray & Gray LLP
If you have salaried employees who are considered exempt from earning overtime pay, you need to know the rules are about to change.
The Department of Labor’s changes to “white collar” overtime exemptions will go into effect on December 1, 2016. So it is important for business owners and managers to get ahead of the process by understanding the new rules and how they could affect payroll budgets.
Under the current Fair Labor Standards Act, salaried employees who earn at least $455 per week ($23,600 per year) do not have to be paid for any overtime hours they work. The Department of Labor’s new regulations increase this threshold exemption level to $921 per week ($47,892 annually per year). The result will be that hundreds of thousands – perhaps millions – of salaried employees will immediately become eligible for overtime pay.
While many workers in the manufacturing and distribution industry are hourly employees, the higher exemption threshold could have a major impact on office workers, managers, supervisors and other “mid-level” people who are paid a salary. Remember, too, that overtime hours will have to be paid at a higher rate for every week the employee works more than 40 hours.
Let’s look at an example: A salaried employee earning $40,000 per year is currently exempt from overtime. But when the new regulations take effect that employee will fall below the expected $47,892 exemption level and be eligible for overtime compensation. If that employee works just one hour of overtime per week for 52 weeks, it will mean an additional $1,500 in payroll costs.
If you consider the total added costs when you employ multiple workers who will no longer be exempt from overtime, you can see how these new regulations will have a significant effect on the cost of running a business. Now is the time to prepare for the changes, or to make adjustments in payroll to mitigate the impact of the higher exemption level.
Start by examining your payroll records to determine if there are salaried employees who may become eligible for overtime when the new regulations take effect. If possible, determine the weekly hours each employee works during the year to anticipate how many (if any) overtime hours will need to be paid.
Next, there are several ways to approach employees who will soon become eligible for overtime under the new rules. Let’s use as an example of a salaried employee who earns $30,000 per year and works 40 hours per week for half the year, but then puts in an average of 48 hours per week during a busier six-month portion of the year. Here are four paths to consider taking:
- Give the employee a raise to $$47,892 per year so they will be above the overtime threshold and you won’t have to worry about it.
- Keep the employee’s salary at $30,000 per year but do not allow them to work overtime. This will keep your payroll budget the same, but may result in the loss of some productivity, or necessitate the hiring of an additional, non-exempt employee to make up the lost hours. Caution: if the salaried employee ever works overtime (even if it is not authorized by the company) you still have to pay them time-and-a-half for the extra hours.
- Reclassify the employee from salaried to hourly, and adjust their hourly rate downward to cover the expected overtime hours, while keeping their overall compensation the same.
- Reclassify the employee without adjusting their hourly rate and pay over $4,000 in overtime.
Your decision on whether or not to reclassify and/or adjust hourly rates may come down to individual cases. Keep in mind, too, that there is a “50% test” that requires exempt workers to avoid doing non-exempt tasks, or risk being eligible for overtime pay. So don’t ask a salaried supervisor to pitch in and drive a delivery truck during a busy week or it could jeopardize their exempt status.
It is important to remember that every state has its own laws governing wages and hours. In addition, many cities have enacted their own regulations as well. You must comply with these state and local laws in each location where you have employees, while also complying with the federal Fair Labor Standards Act.
The new threshold for exempt employees has the potential to affect millions of employees and their employers, including those in the automotive parts manufacturing and distribution industry. We urge you to consult with your HR department or outsourced payroll provider to determine the scope of the new regulations as they will apply to your business.