By Michael D. Koppel, CPA, PFS, CITP, MBA
Retired Partner at Gray, Gray & Gray, LLP

The Department of Labor’s proposed changes to “white collar” overtime exemptions are expected to be finalized and put into effect in late 2016 or early 2017. So it is important for business owners and managers to get ahead of the process by understanding the proposed rules and how they could affect payroll budgets.

Under the current Fair Labor Standards Act, salaried employees who earn at least $455 per week ($23,600 per year) do not have to be paid for any overtime hours they work. The Department of Labor’s proposed regulations are expected to increase this threshold exemption level to $970 per week ($50,440 per year). The result will be that hundreds of thousands – perhaps millions – of salaried employees will immediately become eligible for overtime pay.

For example, a salaried employee earning $40,000 per year is currently exempt from overtime. But when the new regulations take effect that employee will fall below the expected $50,440 exemption level and be eligible for overtime compensation. If that employee works just one hour of overtime per week for 52 weeks, it will mean an additional $1,500 in payroll costs.

If you consider the total added costs when you employ more workers who will no longer be exempt from overtime, you can see how these new regulations will have a significant effect on the cost of running a business. Now is the time to prepare for the changes, or to make adjustments in payroll to mitigate the impact of the higher exemption level.

There are several ways to approach each employee who becomes eligible for overtime under the new rules. Let’s use Employee A, a salaried employee who earns $30,000 per year and works 48 hours per week, as an example.

1. Keep the employee’s salary at $30,000 per year but do not allow them to work overtime. This will keep your payroll budget the same, but may result in the loss of some productivity, or necessitate the hiring of an additional, non-exempt employee to make up the lost hours. However, if the employee works unauthorized overtime you still have to pay them at the higher rate.
2. Reclassify the employee from salaried to hourly, and adjust their hourly rate to cover the expected overtime hours, while keeping their overall compensation the same.
3. Give the employee a raise to $50,440 per year so they will be above the overtime threshold.
4. Reclassify the employee without adjusting their hourly rate and pay almost $9,000 in overtime.

Your decision on whether or not to reclassify and/or adjust hourly rates may come down to individual cases. Keep in mind, too, that there is a “50% test” that requires exempt workers to avoid doing non-exempt tasks, or risk being eligible for overtime pay.

It is important to remember that every state has its own laws governing wages and hours. In addition, many cities have enacted their own regulations as well. You must comply with these state and local laws in each location where you have employees, while also complying with the federal Fair Labor Standards Act.

The new threshold for exempt employees has the potential to affect millions of employees and their employers. We urge you to consult with your HR department or outsourced payroll provider to determine the scope of the new regulations as they will apply to your business.

For additional information, please contact Gray, Gray & Gray at (781) 407-0300.