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Overtime Law Changes

Overtime Law Changes

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As of November 22, 2016 a Texas Federal judge blocked the administrative rule granting a motion for a nation wide injunction.

On December 1, a huge change to the “white collar” exemption of the Fair Labor Standards Act will go into effect. The “white collar” designation comes from the exemption being for salaried employees in executive, administrative, or professional (EAP) jobs. Under this new rule (announced in May 2016), any salaried employee making a salary of less than $913 a week ($47,476 annually), will automatically qualify for overtime pay (generally 1.5 times regular hourly rate) for working more than 40 hours a week.

This is twice the previous overtime pay exemption threshold set over a decade ago at $23,660 a year. To prevent this amount from stagnating for another decade, the new rule also has tied the salary and compensation levels to index to be updated every three years to remain at the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region (the South for 2016), using data from the Bureau of Labor Statistics. The United States Department of Labor (DOL) estimates this will extend to 132,000 workers in NJ – 4.2 million across the country. So which salaried workers in your dealership will be affected?

Generally, parts department employees, mechanics and salesmen are exempt. As recently as this past June, the Supreme Court has declined to decide its service advisors are exempt under the “duties” exemption. While service advisors do not sell, repair or service cars, they are necessary in the sale of service of the vehicles. Currently they maintain the exempt status, but the case is ongoing in the Ninth Circuit Court of Appeals to determine whether or not they will stay truly exempt.

This will affect your department managers and assistants, foremen, and office staff (tech staff, receptionists, HR and accounting), if they are salaried and earning less than $47,476 annually. How can you protect your dealership’s cash flow? Your dealership needs to determine which employees will be reclassified as nonexempt and implement any changes prior to the rule taking effect.

As always, you need to protect your dealership from potential DOL violations and IRS audits. A good payroll provider can go a long way in helping you maintain a properly executed and automated time-keeping mechanism. The DOL will give violations if no time-keeping exists, and federal law mandates that your dealership is responsible for tracking hours for all employees who are at or below the $47,476 salary threshold.

Maintaining accurate records will also help in the event of a potential side effect of this new rule. Potentially, there could be an uptick in lawsuits filed by employees (or former employees) over wages and hours, particularly if you opt to trim your workforce to reduce salary costs.

Now that we have the background, here are the possible reactions to consider for your dealership:

  • Reclassify salaried EAP employees who are at or below $47,476 annual salary, track their time, and do not limit overtime, incurring the additional costs of time-and-a-half.
    • Some employers have expressed that to offset the cost, they are reducing other benefits, such as vacation time accruals, health care, or bonuses.
  • As above, reclassify the non-exempt salaried EAP employees, track their time, and implement a written policy that limits overtime without authorization. This can help reduce the cost of overtime hours, but could also limit the amount of work that can be completed. Alternately, dealers could reduce hours and split jobs into more individuals to avoid overtime.
  • Identify salaried EAP employees who are under the $47,476 salary, and lower the employee’s base hourly pay to offset the overtime cost. However, this is a risky move that would lower morale.

Regulations will continue to expand, develop and change. As always, you can turn to your Withum accountant or consultant for additional information.

Teresa Allesi Karen Koch, Team Member, Automotive Services
T (732) 828 1614

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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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