This July will mark one year since the Department of Labor (DOL) proposed new terms for overtime exemption regulations which would more than double the minimum salary requirement for white collar exemptions.
The finalized requirements are expected to be released later this year, leaving small business owners with a limited amount of time to ensure compliance. Planning ahead is also critical to ensuring business continuity and a smooth transition for employees. Here are some steps you should follow:
1. Review the Proposed Changes
The proposed revision raises the salary exemption to the 40th percentile of all weekly earnings for full-time, salaried employees from $455 per week (currently) to an estimated $970 per week or $50,440 annually.
The DOL also announced plans to increase the exemption for highly compensated employees to the 90th percentile of annual wages of all full-time salaried workers. This proposed change would raise the current level of compensation from $100,000 to $122,148 per annum.
2. Assess Your Current Employment Compensation Plan
To be considered exempt, employees must generally satisfy three tests:
a. Salary-level test – Employees who are paid $455 per week are exempt. Likewise, employees who earn at least $100,000 are exempt if they routinely perform executive, administrative or professional duties.
b. Salary-basis test – Employees who receive a “guaranteed minimum” salary regardless of the quality or quantity of their work.
c. Duties test – The three categories of exempt job duties are executive, administrative and professional.
3. Determine Your Compliance Strategy
Once you have assessed your current employment structure and compensation plans, you will have two options if the proposed changes become final:
a. Re-classify the employees as non-exempt and pay overtime whenever they exceed 40 hours in a workweek; or
b. Increase their salary to meet the new requirement
The option you choose will be dependent on your current operations and the number of hours your workers typically put in on a regular basis.
Payroll processing leader, ADP, provided an excellent example in their recent blog post entitled Answers to Your FAQs about New OT Rules, Workplace Policies & More. In this post, they explain how employers can handle the proposed change while minimizing costs.
“Example: An exempt employee’s current salary is $715 per week, the employee regularly works 50 hours per week, and you want to convert this employee to an hourly employee but keep your costs the same. You would calculate the hourly wage as follows:
$715 weekly salary divided by (40 hours + (10 overtime hours x 1.5)) = $13 hourly rate
This employee would be paid $13 per hour for the first 40 hours and $19.50 per hour ($13 x 1.5) for each hour of overtime. If the employee works more than 50 hours, costs would increase. If the employee works less than 50 hours, costs would decrease.”
4. Communicate with Your Team
If the proposed regulations become final, your small business will be equipped to handle the changes with adequate tax planning. You will want to ensure that your employees are fully informed in advance, of any changes that will be implemented. Give them the opportunity to ask questions and be sure to address their concerns in a timely manner.
Here at Remote Quality Bookkeeping, we continue to stay informed about ever-changing labor (and tax) regulations to ensure that our clients remain in compliance. Be sure to review the full list of proposed changes on the Department of Labor’s website and contact us for more information.