
INSIGHTS FROM OUR NATIONAL TAX OFFICE	MAY 20, 2016

Employers Face New Salary Threshold for Overtime Pay

On May 18, the U.S. Department of Labor (DOL) released its long awaited final rule updating its overtime regulations. These regulations govern which executive, administrative, professional, outside sales and computer employees (so-called "white-collar workers") are entitled to minimum wage and overtime pay protections under the Fair Labor Standards Act.

Current Rules

Employees subject to the overtime regulations must be paid at least one and one-half times their regular wage rate for any hours they work beyond 40 in a workweek. Currently, to be exempt from the overtime rules, an employee generally must meet all of the following:

Be salaried, meaning 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.
Be paid at least a specific salary threshold, which is $455 per week (the equivalent of $23,660 annually).
Primarily perform executive, administrative, professional, outside sales or computer duties (as defined in the regulations).

These guidelines have been in place since 2004. They generally apply to employers having at least two employees and annual sales of at least $500,000 as well as (regardless of sales volume) hospitals, businesses providing medical and nursing care for residents, schools and preschools and government agencies.

Updated Salary Threshold

Proposed regulations issued last year would have increased the salary threshold from the current $455 per week to $970 per week ($50,440 annually) and provided for annual inflation adjustments. After receiving more than 270,000 comments, the DOL set, in the final rule, an updated salary threshold of $913 per week (the equivalent of $47,476 annually).

The salary threshold will be updated automatically every three years; the first update will take effect on January 1, 2020. In addition, the final rule allows employers to include nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold so long as employers pay these amounts on a quarterly or more frequent basis.

The final rule is effective December 1, 2016, so that employers have time to address changes necessary to comply.

Example

Let's say a business has 10 of its salaried employees being paid at the equivalent hourly rate of $15. Due to their pay and job responsibilities, these employees have been considered "white collar workers" exempt from the overtime rules. During 2017, each employee works 100 hours of overtime and is compensated at the rate of $22.50 per overtime hour. This results in an additional salary cost to the employer of $22,500 for 2017. Assuming the additional overtime pay is subject to benefits equal to 10 percent of total compensation (primarily employer share of FICA and Medicare), the cost of the overtime for the 10 formerly overtime exempt employees rises an additional $2,250 to nearly $25,000.

Get Ready

Employers relying on overtime to maintain customer service during certain times of the year may find many more employees need to be paid for their overtime hours. With the December 1 effective date in mind, steps to consider in coming months include:

Analyze current pay rates for employees and overtime being worked to determine the potential financial impact of the increased overtime salary threshold.
Review employee duties and responsibilities to determine the extent to which workloads can be balanced and/or part-time help hired to minimize the need for employees working overtime.
Discuss employee morale and retention with HR personnel or consultants as compensation and job responsibilities are revised in response to the DOL's final rule. Employee meetings may be critical to explain new overtime policies and restrictions, if any, and adjustments to base pay.
Ensure IT personnel or consultants are aware of the final rule and make the necessary programming changes to payroll systems in order to compute the proper overtime amounts and report the related income and employment taxes.

For more information on the new overtime rule and assistance analyzing its financial impact, please contact your Eide Bailly LLP professional.

Eide Bailly's National Tax Office serves as a resource for clients to help analyze complex tax issues related to business decisions. Our professionals are committed to helping clients stay informed about tax news, developments and trends through various specialty areas, including cost segregation studies, wealth transfer, state and local taxation, international tax, IRS controversy and procedures, R&D tax incentives, tax-exempt organizations, tax legislation, accounting methods and pass-through entities.

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