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Employers prepare: 7 strategies to deal with (deadline postponed) OT changes

11-23-2016

Update: On Nov. 22, 2016, a federal judge in Texas issued a nationwide injunction halting – at least for now – regulations that would have increased the number of workers qualifying for overtime pay. While the future of the mandated overtime increase is in question, it still makes sense for employers to make the preparations described below in case the new regulations move forward in some fashion.

Time is running out to prepare for new overtime rules under the Fair Labor Standards Act.

More employees than ever will be eligible for time-and-a-half overtime when they work more than 40 hours a week, but the repercussions go far beyond more money in the paychecks of some 4 million American workers who pack in the hours.

The new rules of the game

The new overtime regulations do the following:

  • Set the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage U.S. Census region, which is currently the South. This calculation sets the standard salary level at $913 per week and $47,476 annually for a full-year worker;
  • Set the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004, which is currently $100,000);
  • Establish a mechanism for automatically updating the salary and compensation levels every three years.

Additionally, the rules amend the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the new standard salary level.  The law does not change the “duties test,” which also affects the determination of who is exempt from overtime.

The three-part test for exemptions

Exemptions from the overtime rule, known as the “white-collar exemption,” must pass three tests:

  1. Salary Basis Test – Workers must be paid on a salary basis, not subject to reduction based on quality or quantity of work, such as an hourly basis;
  2. Salary Level Test – An employee’s salary must meet the minimum level, which as of December 31, 2016, will be $913 per week or $47,476 annually; and
  3. Standard Duties Test – The employee’s primary job duty must involve the kind of work associated with exempt executive, administrative, or professional employees.

It is important to note that the salary basis and salary level tests do not apply to teachers, lawyers and doctors.

The path to prepare

Before the Dec. 1 date, employers would be well-advised to:

  • Meet with legal, accounting and HR advisers
  • Review payroll records to determine the employees who will be affected by the new rules
  • Perform a cost analysis of the impact of the new rules, based on current salary and hours worked
  • Re-evaluate job descriptions
  • Analyze bonus and incentive pay arrangements
  • Assess workloads and schedules
  • Implement a system for tracking overtime
  • Define what counts as “hours worked”
  • Communicate overtime policies to your employees
  • Update personnel policies and employee handbooks
  • Educate your workforce

7 strategies for employers

After the impact of the new rules is determined, employers may want to consider one or more of the following options:

  1. Reduce the hours of some employees to 40 hours a week or less
  1. Increase salaries to the minimum requirement
  1. Implement bonuses that will take employees over the $47,476 annual salary threshold for overtime
  1. Lower salaries to offset the impact of overtime
  1. Hire additional workers, perhaps hourly
  1. Reorganize workloads, adjust schedules, and/or spread hours
  1. Require advance authorization for overtime hours

The Obama Administration’s goal with the new changes is to ensure that workers are paid fairly for a hard day’s work. But it’s vital for businesses to prepare before unexpected overtime costs lead to unexpected and under-performing bottom lines.

Edward J. Straley is a principal at Boyer & Ritter, LLC and focuses on assurance services for not-for-profit, single audit, health care, construction, manufacturing and peer review clients and is a member of the firm’s Entrepreneurial Business Services and Not-for-Profit Services groups. He can be reached at 717-264-7456 or estraley@cpabr.com

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