A Second Look at What New OT Pay Will Mean for You
By Christine Hall, CPA, Hall, Murphy & Schuyler, PC
In last month’s article I discussed the new minimum salary rules that can have a drastic effect on your business if you employ salaried workers. To recap, 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).
I also discussed the options that employers have to comply with this new law. There have been some questions surrounding these solutions and I would like to discuss those solutions in more detail this month.
There are four methods of calculating overtime pay to comply with the new standards. We will address three of four here. All four methods can be viewed on the Department of Labor’s website.
The first is to pay the employee just as if they were an hourly employee. This method works well if you have an employee that typically works 40 hours in a week and you pay them less than $46,476.
To comply, you can do nothing and leave them at a lower salary. Essentially, this changes their status to a non-exempt employee (hourly employee), which means if they do work overtime, you will have to pay them overtime.
For instance, if you pay an employee $30,000 per year ($576.93 per week) for 40 hours per week and they work 42 hours in any given week, you will have to pay them overtime. The calculation would be to take their $576.93 per week salary, divide it by 40 hours per week (or $30,000 per year/2,080 hours) for an hourly rate of $14.43. The overtime rate will be $21.65 ($14.43 x 1 ½). Their total pay for that week will be $620.23.
The second option is for an employee that consistently works the same number of hours per week and it is more than 40. Essentially, the overtime is built in.
In this example, let’s assume that an employer and employee agree to $760 per week for a 45 hour work week. The agreement here is that the employee has agreed to work for $16 per hour regular pay plus $24 per hour overtime pay. This is figured by 40 hours per week x $16 per hour for a total of $640 regular pay plus 5 per week x $24 per hour for a total of $120 overtime pay. However, if the employee works more than 45 hours in any given week, the hours over 45 must be paid at overtime rates ($24 per hour).
The third option is much more complex and the option I related to in last month’s article. For clarification, this option is for those employees who work fluctuating hours (the guidance for this method of calculation is based on current law, Section 29 CFR 778.114, US Department of Labor).
In this case, let’s assume that an employee is paid a salary of $600 per week ($31,200 per year) and over a four-week period the employee worked 40, 35, 46 and 50 hours. Their pay will be calculated as follows:
Week 1: $600
Week 2: $600
Week 3: $600/46 hours = $13.05 per hour
$13.05 x 1.5 for overtime pay = $19.58 per hour
$19.58 per hour x 6 hours plus $600 = $717.48
Week 4: $600/50 = $12.00 per hour
$12 x 1.5 for overtime pay = $18.00 per hour
$18 per hour x 10 hours plus $600 = $780.00
The fluctuating workweek method of overtime payment may not be used unless the salary is sufficient enough to assure that the employee will make at least minimum wage. There also must be a clear understanding between the employee and employer if using this method.
This new rule becomes effective Dec. 1; however, the House of Representatives has voted to extend the compliance date for six months to June 1, 2017. The extension is currently waiting for Senate approval. Our suggestion is to be prepared to implement these changes Dec. 1 to avoid the last-minute crunch!
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.