Does the New Overtime Rules Affect Your Payroll Expenses?

Steve is a product manager at an assembly line of a medium size manufacturing company in Shady Grove, MD. He has been working at the same employer for the past ten years. He wakes up at 5 am so he can start his shift at 6. As a manager, he works about 14 to 16 hours a day, 6 days a week. Steve is very passionate about his job and he earns a salary of $39,750 a year. At 16 hours average daily, his pay is just shy of $8 an hour. Steve is not qualified for overtime pay because he is an exempt employee under current Department of Labor (DOL) regulations.

Coming later this fall, these requirements will be changing in Steve’s favor. Steve, who is currently an exempt employee, will become non-exempt if his pay remains the same after the new regulations proposed by the DOL are finalized.

A non-exempt employee who works more than 40 hours a week is entitled to overtime pay (one-half times their regular rate of pay) according to the Overtime Pay Requirements of the Federal Labor Standards Act (FLSA).

Per the current regulations, three tests must be met for an employee to be an exempt (no paid overtime) employee:

A. Salary Basis Test: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.

B. Salary Level Test: The amount of salary paid must meet a minimum specified amount of $455 per week or $23,660 a year.

C. Duties Test: The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

As of March 13, 2014, President Obama has signed a Presidential Memorandum allowing the DOL to review and revise the Overtime rules to ensure that non-exempt workers are getting fair wages.

These revisions are spearheaded toward updating the section 13(a) (1) which covers exemption’s salary requirements. These revisions, if approved, might have costly effects on companies’ payroll expenses.

1. What will be affected? Just the salary level test will see major changes if the revisions are approved. According to the Department of Labor, the salary level will be adjusted to the 40^th percentile of weekly earnings for full-time salaried workers. If calculated based on 2013 data, the proposed salary amount would equal $921 per week or $47,897 annually for a full-year worker. For 2016, the level will be set at $970 a week or $50,440 a year. For Highly Compensated employees (HCE), their annual compensation will also be adjusted to the 90^th percentile of earnings for full-time salaried workers, or $122,148 annually.

2.Who will be affected? All employees who are exempt under the three tests mentioned above will be affected by the new overtime rule. It is worth noting that about 11 million workers will see some change in their status due to this new ruling. However, computer professionals earning $455 per week or $27.63 an hour, and certain professionals including doctors, lawyers, and teachers, are not subject to the salary level test.

3. What should you look out for? Review your exempt employees’ salaries and see if these employees are still exempt under the new salary level test. If you have exempt employees paid below the new proposed ruling, employers need to start making provisions to adjust these employees pay before the rulings are made final or else they will no longer be considered exempt.

At this point, the Department of Labor is not proposing any modification to the Salary Basis Test or the Duties Test portions. However, the DOL is accepting comments from stakeholders as to whether the current rules are working as written. We might see some changes on those criteria’s as well.

If you would like more information or assistance, an MKS&H representative is always ready to discuss how we can support changes like this within your business.

Article contributed by Joe Amewu, MKS&H Tax Senior

About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.

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