BGBC Partners, LLP Tax Update: New Overtime Rules
As a store owner and employer, you may have already heard about the new overtime laws that the Department of Labor enacted this past May 2016. And of course you’re wondering how they affect you as an employer. Your employees are probably wondering too. Here are the facts that you need to know, highly simplified:
An employee is either exempt or non-exempt, based on his salary and type of work. If non-exempt, the employer must pay that employee one and a half times the pay rate for more than 40 hours worked in a week. So what makes an employee exempt (i.e. you don’t have to pay overtime)? There are three tests that employees must meet (and they must meet all three) in order to be classified as non-exempt:
· The employee should be paid a fixed salary that doesn’t vary based on the amount, type, or quality of work
· The salary must meet a certain threshold level
· The employee’s job must involve administrative, executive, or professional duties
The biggest change to the new law is that the exemption salary threshold increased from $23,660 to $47,476 per year ($913 per week). This means that if you’re paying your store manager or secretary under $47,476, you will now have to pay overtime if he works more than 40 hours per week. Why this huge increase in the threshold? The last time it was updated was 2004, and the old threshold of $23,660 is now below the 2015 poverty line for a family of four. The new threshold is based off of the 40th percentile of full-time salaried workers in the lowest-wage census region.
So you’ve determined that you have some employees who work at your store who were previously exempt, but now, because their salaries are less than $47,476, are non-exempt. What should you do? The new rule goes into effect December 1, 2016, so you have until then to decide how to comply. You should assess how much overtime you estimate those employees will work, and how close their current salaries are to the new threshold, and determine if it makes more sense to increase salaries to meet the threshold, or simply pay overtime. Note that bonuses, commissions, and incentive payments now count towards this salary threshold, as long as they are 10% or less of the total salary. Your other option is to limit the number of hours an employee works to 40 per week.
Currently, you probably aren’t tracking the time of these newly non-exempt employees. If you decide to simply pay overtime to comply with the new law, you must track their time. The Department of Labor doesn’t require a specific time tracking system or method; it just should be accurate.
Going forward, the Department of Labor will update the salary threshold every three years, with the next update on January 1, 2020. Note that the rules above concern the Fair Labor Standards Act (FLSA) on a national level, and state by state, overtime rules can be stricter.
If you believe your store and employees will be affected by these changes in the overtime laws, consult a CPA to determine your options and next steps. After all, it’s important to be compliant, but you aren’t required to give away the store!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.
For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).
