[Editor’s note: On May 18, the US Department of Labor released its final rule regarding the changes to the overtime threshold for the Fair Labor Standards Act. Among other things, the Labor Department has doubled the minimum salary needed to qualify for these exemptions, from the previous level of $455 a week (or $23,660 a year) to $913 a week (or $47,476 a year), with increases every three years thereafter. This article, originally published on April 11, has been updated to reflect the final ruling.]
After months of speculation, on May 18, the US Department of Labor released its much-anticipated final rule that raises the white collar overtime exemption threshold under the Fair Labor Standards Act (FLSA). The new regulations take effect on Dec. 1, 2016.
The revised overtime pay regulations, which are estimated to affect at least 4.2 million American workers, will increase the salary threshold for the overtime exemption from $455 a week ($23,600 annually) to $913 a week ($47,476 annually).
As a result of this regulation, businesses will need to start tracking hours for exempt salaried employees who are at or below the $47,476 threshold, said Stacey Browning, executive vice president and chief strategy officer for Paycor, a provider of HR and payroll software.
“Many employers do not currently track the number of hours their salaried employees work. If you do not track these employees’ hours, you should begin doing so immediately,” she said.
AccountingWEB asked Browning eight questions regarding the final regulations, touching on topics such as the reasoning behind the changes, pros and cons, and the important role CPAs will play in helping their small business clients comply with the new rules.
AW: What is the reasoning behind the Department of Labor revising its overtime regulations?
Stacey Browning: The changes can be attributed in part to the fact that a growing number of employees are working more hours and not being compensated for them. At the heart of the final rule is the Department of Labor’s attempt to comply with President Obama’s goal of ensuring workers receive “a fair day’s pay for a fair day’s work.” The memorandum signed by President Obama on March 13, 2014, instructed the Department of Labor to look for ways to modernize and simplify FLSA regulations while ensuring that the FLSA’s intended overtime protections are fully implemented.
The final rule isn’t necessarily about collecting more fines on businesses. On one hand, increasing the exemption salary level is broadly beneficial and seems to make good common sense. The initial white collar exemption level was set in 1975 and hasn’t been changed since. Forty years’ worth of inflation has put a $23,600 per-year salary below the poverty line in today’s society, whereas in 1975, it placed someone in the upper 38 percent of workers. The poverty line for a family of four was $24,008 in 2015.
Also falling under the “common sense” approach, one of the stipulations of the Department of Labor’s threshold increase is for the white collar exemption salary to be tethered to the poverty line, which will more easily facilitate future increases or alterations.
AW: What are some pros and cons of the new regulations?
Browning: More than just updating the overtime threshold for modern standards, the Department of Labor’s final rule could benefit women and minorities in the workplace. The gender wage gap puts a lot of women in middle management firmly in the zone that would be covered by the salary exemption increase. On average in 2014, female managers earned $981 per week, compared to the $1,346 weekly salary earned by men.
The rule also addresses the gap in median income experienced by black and Hispanic Americans. In 2013, white Americans reported a median income of $55,257 annually, significantly more than the $40,963 average for Hispanic Americans and the $34,598 median for black Americans.
Another pro is that the regulations could promote better company behavior. The changes could serve as a detriment to some larger companies that may be cutting corners when it comes to paying employees for overtime.
As far as cons, one is that rural businesses may suffer. Smaller companies based in rural areas could be uniquely affected by new laws, as salaries in the $30,000 to $49,000 range can represent a comfortable income in small-town America. Having to pay overtime in those areas of the country can potentially cripple a business’ ability to operate and grow.
Another fear applies to businesses of any size: an uptick in the already-increasing trend of lawsuits being filed over wages and hours. As these types of litigation often involve recently terminated employees and their former employers, more concerns abound for small to midsized businesses. Those that may choose to trim their workforce in order to help the bottom line and meet FLSA compliance regarding the new overtime rules could lose any financial savings to court costs and representation.
AW: Do you think small businesses will be impacted most by the changes?
Browning: Small businesses with a high number of hourly and seasonal employees, nonprofits, and retail, restaurant, and manufacturing industries will be most affected.
Overtime can be costly for small businesses with fewer employees and locations, especially when there may be just a few vital managers or workers whose occasionally heavy workweeks are both expected and necessary. This could either lead to tighter budgets for those businesses or unexpected layoffs of valuable employees no longer over the exemption threshold.
AW: Should small business owners be implementing new processes and systems now so they are in compliance when the new regulations take effect on Dec. 1?
Browning: Those who may be affected by the new regulations are salaried exempt employees making $47,476 per year or less. Small business owners should have a plan in place for each of these employees, as they may become eligible for overtime pay. Depending on their current salary, their role, the classification of their role, and the number of hours they work, each employee will have a different outcome. You should start by creating a list of every exempt employee and their compensation to make the best decisions for your organization.
Having an accurate calculation of hours worked per week will be very important as you seek to comply with these new regulations. Employers will need to have a time and attendance tracking solution that helps them accurately manage their employees’ hours through a unified system with payroll. Enabling employers to run real-time reports on hours worked and employees’ rate of pay will be a critical advantage.
Download Paycor’s 7 Step Guide to Mastering the Final Department of Labor Overtime Regulations for more tips on how to prepare for the new changes.
AW: What can a small business do to avoid becoming a target of an employee lawsuit or a Department of Labor audit under the new regulations?
Browning: It’s critical that employers have accurate hourly data and a clear audit trail for the hours their employees have worked for a few reasons.
- Accuracy: As a result of the new regulations, employers will have to pay their salaried employees who are below the new threshold for any overtime hours worked.
- Audit trail: If an employee reports your organization for not following the new regulations, the Department of Labor will audit your business.
- Decision support: As you consider how you will handle each employee’s labor situation, you will need to have accurate employee time data. The amount of hours they currently work directly impacts how you choose to handle their compensation.
AW: What kind of conversations should small business owners have with their employees regarding the changes?
Browning: Employers should communicate the changes to employees now to prepare them for the potential impact. Small business owners need to be transparent about the current state of the regulations – it’s public knowledge. Let employees who could be impacted know there is a chance they may be reclassified to nonexempt.
Train managers prior to the communications so they can be prepared to answer employee questions, and have employees assist in tracking their own hours, as some employees may have to work from home after-hours and on the weekends.
Owners will need to begin developing broader communication plans within their organization to effectively communicate any changes.
Download Paycor’s Essential Employer Conversation Guide to help manage challenging conversations with affected employees.
AW: Do you believe the new regulations will have an impact on key business decisions, such as hiring, benefits, or flexible work opportunities?
Browning: Yes, because the changes will limit flexible schedules for affected employees. There are three main options for employers to consider:
- Raising salaries to the exemption threshold: If employers decide to raise salaries to the higher threshold, they will incur additional costs for each employee. For example, if you have an employee who makes $40,000 a year and you raise their annual salary to $47,476 – the final threshold – you will automatically add $7,476 per year to your operating costs for just one employee.
- Reclassify affected employees and do not limit overtime: If employers decide to not limit overtime, they will also incur additional costs for each employee. It will be crucial for employers to understand exactly how many hours their employees are working to make sure they set their new pay structure appropriately.
- Reclassify affected employees and prohibit overtime without authorization: This option will likely reduce the number of hours some employees work. This could be seen as a benefit, but it may also mean that affected employees cannot accomplish the same amount of work.
AW: How important of a role will a small business owner’s CPA play in the compliance process? What key issues will a CPA be able to advise the business owner on?
Browning: Many small business owners rely solely on their accountants as their most trusted advisor for compliance, and this reliance will continue to increase as regulation changes increase in the future. In addition, compliance through technology becomes more effective when a business owner has the aid of a strong advisor, or team of advisors, to interpret the specific regulations that impact the owner’s business.
Depending on the client’s needs, an accountant should provide a customized compliance approach. This can range from simple quarterly business reviews, to macro-level advice on general compliance risk areas, to a strategic approach where the CPA takes the lead to establish a compliance team with the client’s other advisors, such as a retirement broker, health and benefit broker, and legal counsel.
Some of the key compliance issues that accountants can help a business owner with include:
- Determining business structure: Each business has a number of options – limited liability company, C corporation, S corporation, or sole proprietorship.
- Establishing accounting principles: Although GAAP is the standard for public companies, some small businesses have begun using the Financial Reporting Framework for Small- and Medium-Sized Entities.
- Taxes: Tax laws change constantly, and accountants are often expected to be the experts in federal, state, and local laws, as well as international in some cases.
- Employee classification: Full-time, part-time, and 1099 contract employees are all defined differently. Each may impact the business and benefit requirements in different ways.
- Payroll regulations: The Department of Labor overtime rule changes and the Affordable Care Act employer mandates are greatly impacting payroll regulations for businesses.
- Audit services: This service can range from simply providing reports in the case of an audit, to defending an audit, to conducting an independent audit to prove compliance.
This list is not comprehensive. Regulations will continue to evolve and change. Accountants will constantly be relied on as the most trusted advisor as long as they continue to lead with proactive advice for their clients.
For more tips on how to prepare for DOL overtime changes, download the free Paycor guide, 7 Step Guide to Mastering the Final Department of Labor Overtime Regulations.