New Rules Mean Careful Planning for Overtime Work

October 24, 2016|

Paper with weekly time sheet on a table.By Christine Hall, CPA, Hall, Murphy & Schuyler, PC

On May 18 the Department of Labor released a final rule that radically increases the thresholds for overtime rules, expanding the number of employees eligible for overtime pay. Most everyone is familiar with the two standard classifications of employees, “hourly” and “salary.”

Hourly employees typically are paid based on the number of hours they work in a pay cycle plus they receive additional compensation for hours worked in excess of 40 per week. Salaried employees typically receive the same amount of compensation each pay cycle regardless of the number of hours actually worked whether it is more or less than 40 hours per week.

The new rule doubles the minimum salary threshold from $455 per week to $913 per week (which amounts to $23,660 annually to $46,476 annually). It also raises the exemption level for those considered to be “highly compensated employees” from $100,000 to $134,004 annual salary.

This new Department of Labor rule can potentially impact major business decisions like hiring, expansion and offering benefits or more flexible work arrangements for employees. If you are an employer that has salaried employees, this change could possibly affect you and the amount of money you must pay your employees.

Here is how:

If you currently have an employee that is a salaried worker and makes a weekly gross paycheck of less than $913 ($46,476 annually) then you will need to make some changes. Your first option is to switch them to an hourly rate. Of course, when you do this it will automatically make them subject to the overtime rules. Your second option is to raise their salary to $46,476 per year.

Every three years this threshold will increase, similar to minimum wage increases. The estimated minimum salary in three years is anticipated to be more than $50,000. Therefore, if you choose to increase your salaried employees pay to meet these new guidelines, be aware that you will have to increase their salary again, by a potentially substantial amount, in three years.

If you choose to keep your salaried employees pay at a level below $46,476, you will now have to pay them overtime on any hours worked over 40 a week.

This new rule becomes effective Dec. 1. Business owners who employ salaried workers will have until then to make determinations on which employees they may want to consider reclassifying as hourly wage employees (or increase annual salaries) and implement these changes.

How it might work

Let’s look at an example. Assume that you have an employee that meets the salaried employee (exempt) rules and you pay that employee $30,000 per year. Let’s also assume that employee worked 43 hours in one particular week. By the old rules, you would simply write that employee their typical standard paycheck and be done with it. With the new rules, the overtime will be calculated as follows:

$30,000 / 52 weeks per year = $576.93 per week

$576.93 / 43 hours worked = $13.42 per hour

$13.42 x 1.5 for overtime pay = $20.13 per hour

$13.42 per hour x 40 hours plus $20.13 per hour x 3 hours = $597.19

In this example, an employee that you would have paid $576.93 for a 43 hour week you will now have to pay $597.19. Each week that employee works overtime; you will have to refigure their overtime rate based on the formula above. As you can see, this can become a very tedious and costly task!

Hall, Murphy & Schuyler, PC is a full-service public accounting firm. They have a staff of experienced professionals that stand ready to meet all of your accounting, tax and general business needs. For a complimentary consultation, call 706-855-7733 or email at cmh@HMandScpas.com.

 

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