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DOL Overtime Rule Changes: How do I Protect my Business from Increased Overtime Costs, Potential DOL Violations and IRS audits?

DOL Overtime Rule Changes: How do I Protect my Business from Increased Overtime Costs, Potential DOL Violations and IRS audits?

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DOL Overtime Rule Provisions

The minimum salary threshold is to increase from $455 to $913 per week; which equates to $23,660 to $47,476 per annum (full year employee). Salaried employees that fall below the salary threshold will be entitled to time-and-a-half wages for each hour they work beyond 40 per week. Another update to the rule includes the total annual compensation requirement for those considered to be highly compensated employees are to increase from $100,000 to $134,004 per annum. The rule takes effect December 1, 2016; therefore companies can now make determinations of which employees to reclassify as nonexempt and implement the changes prior to the rule taking effect.

Who does this apply to?

Including, but not limited to, executive, administrative, professional, outside sales and computer employees under the Fair Labor Standards Act. An estimated additional 4.2 million employees that work within these job classifications will become entitled to the rule. The updates to the rule aim to increase pay; ensuring every worker is compensated fairly for their hard work. Examples of employees that are ‘generally’ exempt from overtime are as follows (however employers should apply the exemption tests that are covered below):

  • Highly compensated employees (white collar exemption)
  • Outside sales employees
  • Commissioned sales employees in retail
  • Computer professionals
  • Drivers, loaders, and mechanics
  • Farm workers
  • Salesmen
  • Seasonal and recreational establishments (does not exceed 7 months of operations)

How can I determine who is exempt in my business?

White Collar Exemption: three tests must be met in order to claim a white collar exemption.
  • Salary basis test: which means they must be paid on a salary basis rather than on an hourly basis.
  • Standard salary level test: Their salary must meet the minimum salary level which is being increased to $913/week or $47,476/annually.
  • Standard Duties test: which means the employee’s primary job duty must involve the work associated with exempt executive, administrative, or professional employees.

Who falls under exempt professional, administrative, or executive employees?

Professional Exemption: includes learned professionals, creative professionals, teachers and employees practicing law or medicine.
  • Standard salary level test: Employee must receive at least $913 a week (the equivalent of $47,476 a year) on a salary or fee basis.
  • Standard Duties test: which means the employee must primarily perform work that either requires advanced knowledge in a field of science of learning, usually obtained through a degree, or that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
Administrative Exemption
  • Standard salary level test: Employee must receive at least $913 a week (the equivalent of $47,476 a year) on a salary or fee basis.
  • Standard Duties test: which means the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. Additionally, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
Executive Exemption
  • Standard salary level test: Employee must receive compensation on a salary basis of at least $913 a week (the equivalent of $47,476 a year).
  • Standard Duties test: which means the employee must have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. The employee must direct the work of at least two other full-time employees or their equivalent (for example, one full-time and two half-time employees). The employee must have the authority to hire or fire other employees.

How can I protect my business from increased overtime expenses?

With less than 3 months to go until the rule takes effect on December 1, 2016; it is imperative that businesses start taking the proper procedures now to determine which employees are eligible for overtime and how to reclassify some of those employees as exempt. Here are the procedures employers should implement now:

  • Track actual hours worked for all employees and review weekly. Employees must clock in and out and lunch breaks must be accounted for. This should be an automated procedure rather than a manual procedure to ensure accuracy of time reporting.
  • After tracking the actual hours worked for the week, determine which employees are eligible for overtime and which are exempt (under the new rules).
  • Analyze employees’ time that are eligible for overtime, consider those employees that have salaries close to the new standard salary level test ($913/week or $47,476/year) and determine whether their salary should be increased to qualify for the exemption. Consider employees that earn salaries that could be reduced to hourly wages below $913/week.
  • Employers must vigilantly monitor non-exempt employees’ hours and implement a written policy to approve actual hours exceeding 40 per week.
    • Disable remote access from home.
    • Disable smart phone accessibility
    • Employees must get approval to:
    • Work from home
    • Work on weekends
    • Stay late to catch up on work
    • Work above 40 hours/week
  • Develop communication with your employees to let them know you will be tracking time and that their employment status may change.

How can I protect my business from potential DOL violations and IRS audits?

A properly executed and automated time-keeping mechanism is key because the DOL will give a violation if there is no time-keeping in existence. It is obligated by federal law for non-exempt employees to have all time recorded. Ensure your business has written policies in effect for employees to request approval for additional hours. Ensure management monitors time every week for non-exempt employees (work from home, work during lunch breaks, work after hours, etc.).

Overall effect on companies

The rule will impact major business decisions such as hiring, expansion, offering new benefits or more flexible work arrangements for employees, and possibly even require reductions. This could make affected employees lose certain benefits and prestige, and may view the shift as a demotion. By limiting the number of hours employees work, Companies may be faced with increasing the workload for other employees and as a result may hurt morale.

WithumSmith+Brown, PC has the professional expertise to guide your company through the overtime rule changes should you require assistance. The rule takes effect December 1, 2016 and company overtime policies should be updated and employees’ salaries should be analyzed to project an increase in overtime expenses and execute pay adjustments.

Terry Moncrief, CPA, Partner Terry Moncrief, CPA, Partner
T (732) 842 3113
tmoncrief@withum.com
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Rebecca Lemanowicz Rebecca Lemanowicz
T (732) 842 3113
rlemanowicz@withum.com

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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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