New Overtime Rule Changes: Are You Ready for the Impact?

Jul 18, 2016

MoneyLife100 Companies have until Dec. 1, 2016, to implement changes in an effort to minimize the effects of a new Department of Labor (DOL) rule that radically adjusts overtime rules and drastically increases the salaries of employees who are eligible for overtime pay. The Pennsylvania Institute of Certified Public Accountants (PICPA) looks closely at the new regulations and how they will impact businesses.

The Fair Labor Standards Act

The Fair Labor Standards Act (FLSA)  is a federal law that establishes minimum wage, overtime pay eligibility, recordkeeping, and child labor standards affecting full-time and part-time workers. Generally, employees of enterprises with at least $500,000 of business or gross sales in a year is covered by FLSA. In addition, employees of certain entities are covered by the FLSA regardless of the volume of sales or business done. These entities include:

  • Hospitals
  • Businesses providing medical or nursing care for residents
  • Schools (whether operated for profit or nonprofit)
  • Public agencies

Nonprofits, schools, and institutions of higher education are generally covered by FLSA’s minimum wage and overtime provisions.

Who Is Exempt?

Under the FLSA, eligible employees who work more than 40 hours in a week are entitled to overtime pay at a rate not less than one and one-half their regular rates of pay, unless specifically exempted. Exempt employees (also called white-collar salaried employees) are excluded from minimum wage, overtime regulations, and other rights and protections afforded to nonexempt workers.

To be considered exempt, white-collar employees generally must ...

  • Be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the "salary basis test").
  • Be paid more than a specified weekly salary level (the "salary level test").
  • Primarily perform executive, administrative, or professional duties (the "duties test").

Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers).

The New Rule

The new rule doubles the minimum salary threshold for exemption from $455 per week to $913 per week (a change from $23,660 annually to $46,476 annually), and raises the exemption level for those considered to be "highly compensated employees" from $100,000 to $134,004 annual salary. Additionally, employers will now be able to use nondiscretionary bonuses and incentive payments tied to productivity and profitability (including commissions) to satisfy up to 10 percent of the standard salary level, provided these payments are paid at least quarterly.

What Employers May Do

The DOL rule may impact major business decisions like hiring, expansion, offering new benefits or more flexible work arrangements for employees, and may even require company reductions. Employers have a range of options for responding to the new rule. For each affected employee now entitled to overtime pay, employers may do one, or a combination, of the following:

  • Increase salary to a new level to meet the duties test and retain his or her exempt status
  • Pay an overtime premium of one and a half times the employee's regular rate of pay for any overtime hours worked
  • Reduce or eliminate overtime hours
  • Reduce base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime hours worked over 40 in the workweek to hold total weekly pay constant

The new overtime regulations will have a significant impact on some businesses. Some may even find it advantageous as the new regulation could increase worker productivity. In any case, business owners should use the next several months to analyze their labor and productivity to get a better understanding of what they will need to change to minimize the effects of the new rules. Whatever option you consider, work closely with counsel or your CPA to ensure that the rules apply to your situation since there are many special exceptions, conditions, and ramifications that apply. For more small business tips, visit www.picpa.org/moneyandlife.

About PICPA

The Pennsylvania Institute of Certified Public Accountants (PICPA) is a premiere statewide association of more than 22,000 members working in public accounting, industry, government, and education. Founded in 1897, the PICPA is the second-oldest and fourth-largest state CPA organization in the United States.

Money & Life Tips are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.


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