May 31, 2016

New Overtime Rule: A Blow to Business, A Blow to CPAs

Mike Colgan, PICPA CEOBy Michael D. Colgan, PICPA CEO and executive director

The U.S. Department of Labor (DOL) on May 18, 2016, released a final rule amending the requirements for overtime pay that dramatically increases the salary thresholds for exemptions. This will have a powerful impact on CPA firms and other businesses here in Pennsylvania and throughout the nation.

Under the Fair Labor Standards Act, employees who work more than 40 hours in a week are entitled to overtime pay unless they meet the exemption requirements of wage level and duties tests. The new rule doubles the minimum salary threshold from $23,660 to $47,476 annually for most employees, and also raises the exemption level for what are considered “highly compensated employees” from $100,000 to $134,004 annual salary. The DOL estimates that this rule change will directly affect some 4.2 million workers across the United States not currently eligible for overtime, and may reclassify an additional 8.9 million salaried workers as nonexempt.

Businesses nationwide are reviewing the new overtime-pay rule, with many companies saying the regulation will lead them to reduce workers’ hours, cut benefits, or limit flexible office arrangements. Companies have until Dec. 1, 2016, to make determinations on which employees to reclassify as nonexempt and implement the changes.

In Pennsylvania, CPA firms and their clients are expressing concern. The rule may be well-intentioned, but it is likely to have unintended consequences. Expanding the pool of overtime-eligible employees will force firms and companies to resort to cost-saving measures to maintain current payroll levels. The DOL received 270,000 public comments on to proposal, many from employers who believe the rule will force them to cap workers’ hours, slow the hiring of full-time employees, and shift salaried workers to hourly schedules.

While most accounting firms will work to absorb the additional payroll expectations, the overtime rule will have significant negative consequences on smaller accounting firms, particularly on major decisions such as hiring, expansion, benefits, and the ability to offer flexible working arrangements. Further, the DOL did not take into consideration the seasonal nature of the accounting profession or the numerous small firms that are unable to increase the salaries of their employees to comply with the exemption threshold and also meet the demands of tax season each year.

After the rule was issued, the American Institute of Certified Public Accountants (AICPA) released a statement from Barry C. Melancon, CPA, CGMA, AICPA’s president and CEO. “The proposed revisions fail to modernize or streamline the regulations, are not reflective of the realities of the modern workplace and a changing workforce, and would adversely affect both employees and employers,” he said. “DOL’s modifications to the rule did little to lessen the likelihood that CPA firms and countless other businesses will be forced to curtail hiring – and may even have to reduce the size of their workforce.”

The PICPA is working with the AICPA and other business groups to urge Congress to intervene so that regulations governing overtime pay reflect the evolving workplace in a manner that is not economically counterproductive. See the summer 2016 issue of the Pennsylvania CPA Journal for more details regarding these new rules.

Check out the one-hour webinar Critical Update: Department of Labor Issues Final Overtime Regulations on June 8 to get an understanding of the final Fair Labor Standard Act relating to exempt vs. non-exempt employees and the changes in the salary test for exempt employees.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.