Posted in Payroll | by: Trevor Russ

A Quick Guide to the New 2016 Overtime Rule

Overtime is getting its time in the limelight. President Obama and Labor Secretary Perez just quintupled the number of people eligible for overtime pay in one of the president’s last moves pushing for workers’ rights. With this final ruling from the Department of Labor (DOL), anyone who makes less than $913 a week, or $47,476 a year, will soon get paid for working any extra hours that go beyond a 40-hour workweek.

As you can guess, a handful of implications emerge for both employees and employers. This article will shed light on the biggest things you need to know about this brand new piece of legislation.

What does it say?

First, let’s breeze through a quick lesson about the Fair Labor Standards Act (FLSA). Under the Act, workers are separated into two pockets: exempt and nonexempt. Exempt employees don’t qualify for overtime because they’re excused from the laws in the FLSA, while nonexempt employees do. In general, an employee has to meet three conditions in order to be labeled as exempt:

  • Salary level test: Gets paid above a certain salary for the year (this is the test that was recently adjusted).
  • Salary base test: Receives a concrete salary that can’t be changed, even if the employee makes a mistake on the job.
  • Duties test: Needs to be in an executive, administrative, outside sales, computer, or professional role. This determination can get complicated, so if you have any questions, talk to an attorney, CPA, or other business advisor.

Today, workers who earn $23,660 or less must collect overtime pay, or time and a half of their normal hourly rate, for working over 40 hours in a single week. These employees are nonexempt, or in other words, the FLSA rules apply to them.

The new overtime law that was passed on May 18th bumps the nonexempt status to anyone making $47,476 or less. This opens up the benefits of overtime pay to millions of people.

The law also contains two other crucial points:

  • The salary level for exempt employees will be revisited every three years to help account for inflation.
  • The salary threshold for a highly compensated employee (HCE) is now increased to $134,004 from $100,000. The main difference between a HCE and a non-HCE is that if an employee qualifies as a HCE, the duties tests is less stringent.

As it stands currently, the new overtime law will go into effect on December 1st, 2016. There is a chance that certain Republicans in Congress will attempt to block the Final Rule but right now there is no way to know if they will be successful or not. Companies should take steps now to plan for the change.

 

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More background

This is a big deal. In 1975, over 60 percent of people who earned a salary were also entitled to overtime pay. Zoom forward to today, and that number is only seven percent. Once the new law is in motion, the DOL predicts overtime will spread to 35 percent of all salaried workers, or 4.2 million Americans. The Economic Policy Institute estimates that the number of people impacted by the rule will be much higher — closer to 12.5 million.

How will it impact me?

If you’re an employee:

It could be good news, but it really depends on your specific situation. If you fall under the new salary threshold, you might start getting overtime pay, have your work hours capped at 40 per week, get switched to hourly, or have your base salary adjusted.

If you’re newly eligible for overtime, you and your employer will have to track your hours more closely so you can get properly compensated for any additional time that you work. And yes, quickly checking your email on your phone counts as work.

If you’re an employer:

Before the new law is effective on December 1st 2016, take an inventory of the hours worked by each employee whose salary will be below the new threshold of $47,476 (or $134,004 if they’re an HCE). With this information on hand, you can make better decisions regarding each employee’s work schedule, the structure of their compensation (i.e. hourly vs. salaried), and how you’ll account for overtime hours.

Quick tips:
  • If you don’t have enough cash to pay your employees more, then you’ll have to reconsider how you staff certain projects. You should start to budget what that will look like now from a cashflow perspective.
  • Make sure that anyone making below $47,476 is classified as nonexempt. It’s a hard and fast rule that will make things a lot easier when categorizing your team.
  • If you do pay an exempt employee less than $47,476 a year, you can make up to ten percent of that amount in the form of bonuses and other incentives. Note that in order for these payments to count, they need to be made at least quarterly.
  • The Final Rule doesn’t change the duties test. If an employee satisfied this test before, that employee should fulfill it after the law change as well.

There are also state laws that layer on top of the federal rules, so make sure you check out your state labor website for more information. For example, hourly employees in California can qualify for overtime if they work over eight hours in a single day, not just 40 hours in a week.

Overtime can be a nebulous thing to understand — whether you’re the one collecting or paying it. But with this handbook sitting next to you, you’ll be ready to make sense of all the changes that are about to come your way.

 

This article is intended to help employers of various sizes gather general information about the new overtime rules. It is not written or intended to be used as business or tax advice. If you have any questions related to the application of these tax laws to your specific situation, please get in touch with an attorney, CPA, or other business advisor.

About Trevor Russ

Trevor is a CPA licensed in California and Washington State. He currently leads tax compliance at Gusto.