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Changes to Overtime Law May Affect Your Business

Changes to Overtime Law May Affect Your Business

On May 18, 2016, the Department of Labor officially updated federal overtime pay regulations, making several changes to the previous rules. These changes are likely to affect employers all across the country in a variety of ways when they go into effect on December 1, 2016.

About the Administrative Exemption

The changes made to overtime regulations focus on the administrative exemption, which is a regulation that allows employers to exempt certain employees from mandatory overtime pay even when they work more than 40 hours in a given workweek.

In order to qualify for an administrative exemption from mandatory overtime pay, an employee must:

  • Be paid on a salary basis, as opposed to an hourly basis.
  • Perform a primary duty that is non-manual labor or office work and pertains to general business operations or management.
  • Have the ability to exercise judgment and discretion in the course of his or her job.
  • Earn at least a minimum amount of money per week.

Specific Requirement Changes 

All of the basic requirements above remain in place after the Department of Labor's Announcement. However, the specifics of a few of these requirements have changed.

  • Minimum Salary. Previously, employees had to earn only $455 per week to qualify for the administrative exemption from mandatory overtime pay. After the new ruling, however, employees must earn at least $913 per week in order to qualify for the exemption. This change increased the percentage of salaried workers in the United States who qualify for overtime pay from 7 percent to 35 percent.
  • Calculation of Salary. Before this change, employers could not use commissions, incentive payments or bonuses to calculate an employee's salary for the purposes of determining whether the employee qualified for an administrative exemption. After this ruling goes into effect, however, employers will be able to use these payments to satisfy up to 10 percent of the administrative exemption's minimum salary requirement.
  • Minimum Salary Adjustments. The Department of Labor's ruling also instituted automatic adjustments to the administrative exemption's minimum salary requirement, which will take place every three years.

How It Will Affect Your Business 

Depending on the nature of your business and the wages you currently pay administrative employees, these new regulations may affect you considerably. Employees who were once exempt from mandatory overtime pay may now qualify, thus raising your labor and payroll expenses.

Likewise, if you decide to raise your employees' salaries so that they continue to qualify for the exemption after December 1, you will still notice an increase in expenses. In light of these possibilities, it is important to begin preparing for this new change as soon as possible.

Preparing Your Business

To prepare for the coming shift in overtime pay requirements:

  • Evaluate the situation. Do the necessary calculations to determine what effect this new rule will have on your company, if any.
  • Compare your options. If you have an employee who will become non-exempt under the new regulations, you have two basic options: raise the employee's salary so that he or she qualifies for the exemption or leave the employee's salary under the minimum requirement and agree to pay over time. One of these options will likely be less expensive for your company than the other.
  • Think about the future. Even if you determine that it would cost your company less to simply increase the salary of employees to the administrative exemption's minimum threshold, this still may not be the best choice in the long run. After three years, this minimum is likely to increase, and you will be forced to increase the employee's salary further or pay overtime at a much higher rate than you would have paid if you had never raised the employee's salary in the first place.
  • Consult a professional. Evaluating your options under this new ruling can be difficult. If you aren't sure how you should prepare for the coming changes to overtime law, consult a professional for assistance.
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Jeff Donohoe, CPA

Jeff Donohoe, CPA

Jeffrey D. Donohoe CPA is a CPA based in Cleveland, OH. His firm J. Donohoe & Associates LLC has been providing quality, personalized financial guidance to local individuals and businesses. Their specialty is state and local tax (SALT) services and they work with other CPA firms throughout the country consulting on SALT issues. Donohoe & Associates provide tax preparation and accounting services, as well as audits, financial statement, and financial planning.

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