A new ruling could make over 4 million more Americans eligible for overtime compensation.
On May 18, the Obama administration announced that the Department of Labor (DOL) has issued its final rule in updating overtime regulations. The new rule extends overtime protections to more wage earners.
Under the new regulations, most salaried workers earning up to $47,476 a year must receive time-and-a-half overtime pay when they work more than 40 hours during a given week. Prior to the new rule, the cutoff for overtime pay was $23,660.
According to the DOL, the change “will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.”
Details of the new rules on overtime
The update focuses primarily on revising the salary and compensation levels needed for “executive,” “administrative” and “professional” workers to be “exempt.” Specifically, the final rule:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, currently the South ($913 per week; $47,476 annually for a full-year worker);
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
How will workers & businesses be impacted by the change?
The controversial move by the administration was designed to increase the number of workers qualifying for overtime hours. However, that is not the only change it is likely to cause. In fact, that is only one of three ways in which local businesses may react to the new law.
Small businesses in particular, rather than being forced to pay out more in overtime wages, may instead opt to limit overtime hours, hire additional employees or raise some employee salaries over the new limit so that they will have more exempt employees.
Each business will have to decide individually which will be a more cost-effective decision. Generally speaking, the new rules are seen as a win for workers.
Still, there are those opposed to the new rules and congressional Republicans say they will block the measure during a mandated congressional review period.
When will the change take effect?
The new rules are effective Dec. 1, 2016. According to the administration, the new rules were enacted to see that middle class salaried workers are treated more fairly. Under the old rules, many were being forced to work overtime without pay.
Under the new rules, workers who previously did not qualify for overtime will now be paid or their employers will have them work fewer hours.
Either way, there is going to be an additional burden on businesses to accurately account for who qualifies—and accurately record the number of hours worked for each employee. Accounting firms can be instrumental in helping employers understand and comply with the revised regulations.
What do I need to do now?
The new rules will have several implications for employers that can make payroll more complex, including increased payroll costs and even possible litigation from those converted to exempt employees.
Employers are urged to speak with tax professionals, and/or attorneys who are familiar with DOL wage and earning regulations to avoid such issues. Consultation can also help develop a strategy for complete compliance with the new ruling.
Steven Blumenthal, CPA is the principal of MBAF CPA’s LLC, located on 440 Park Avenue South, New York, NY 10016. He can be reached by telephone at (212) 931-9254 or email at firstname.lastname@example.org. Compliance with and understanding the difference between scams and legitimate income tax problems can be complex. If you would like to benefit from MBAF CPA’s LLC’s expertise in these areas, or if you have further questions on this advisory, do not hesitate to contact their tax & accounting specialists at (212) 576-1400.