Aug 04 New FLSA Overtime Rules

The United States Department of Labor has issued new overtime rules which will become effective on December 1, 2016. These changes to the Fair Labor Standards Act (FLSA) are primarily focused on updating the salary and compensation levels in which an employee will be exempt.

Under the current regulations, an employee must meet two tests to be exempt from overtime payments: 1) job duties that are classified as exempt and 2) a salary that is at or above $455 per week ($23,660 annually).

Once the new rules take effect, the salary threshold will be increased to $913 per week ($47,476 annually). This means that any of your current employees with a salary of at least $455 per week, but less than $913 per week, will now need to be paid overtime for any hours worked in excess of 40 hours per week.

What can you do to minimize the effect of the potential increase in your payroll and related payroll tax costs?

1. Under certain circumstances, it may be most beneficial to make no changes and pay overtime to this new group of employees as required.
2. Manage the overtime by reassigning work or putting the work off to a time when less work hours are required.
3. Increase the salary to the new base of $913 per week. Keep in mind that the base will be subject to change every three years.
4. Add additional employees to spread the work over more people, thereby reducing the hours of the current employees.
5. Convert the salary staff to hourly and only pay for the actual hours worked (i.e. if someone leaves two hours early for a medical appointment, they are paid two hours less that week). Make sure to carefully consider how morale might be affected by converting salaried employees to hourly status.
6. Adjust the base pay of the employees who fall into this new category. This works where an employee currently works in excess of 40 hours per week and approximately the same number of hours each week. In this case, the base pay for the 40 hours is reduced, but the weekly gross when the overtime hours and premium pay are included, is the same as the base pay before this change.

Example:

• Current Salary: $35,000/year ($673.08/week)
• Current Hours: 44/week (52 weeks per year)
• Salary Under New Overtime Rules: $40,257.36/year ($774.18/week)

Detailed Calculation of the Example Above:

1. Divide original weekly salary by 46 hours (actual hours worked + overtime requirement)

$673.08 ÷ 46 hours = $14.63

2. Multiply result by 40 hours to calculate new weekly base salary

$14.63 x 40 = $585.20

3. With overtime factored in, the new weekly base salary for a 44-hour workweek is $672.98

4. The new annual salary will be essentially the same as the original:

672.98 x 52 = $34,994.96

Note that this example presumes working 44 hours every week of the year, which is not likely. After factoring in vacations and holidays, the annual salary with the reduced base will be a salary decrease. This can be made up with a bonus if so desired.

Other implications of the new rules should also be considered, such as:

1. Compensating time off is not allowed for non-exempt employees.
2. Networking events or training after an eight hour day could be curtailed. If the employee is non-exempt, these hours will be considered work hours and must be compensated.
3. Employees in the public sector can still have compensating time off. Teachers, coaches, graduate and undergraduate teaching assistants and college administrators are also exempt from these rules.

Fact sheets provided on the U.S. Department of Labor website explain the changes, exempt duties and other important overtime information in greater detail. If you have any further questions regarding these new overtime rules, please contact Alan S. Isaacs, CPA, MBA at [email protected].