Time to prepare for overtime changes

Time to prepare for overtime changes IMAGE BY SHUOSHU/ISTOCK By Barbara Bryniarski, CPA, MST Sponsored by AccountantsWorld • ADP • Paychex • Zenef...
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Time to prepare for overtime changes


By Barbara Bryniarski, CPA, MST

Sponsored by

AccountantsWorld • ADP • Paychex • Zenefits




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s a result of recent changes to the Fair Labor Standards Act (FLSA) rules on overtime pay, millions of workers will be eligible for time-and-a-half pay, effective Dec. 1, 2016. The changes are estimated to affect over 4 million workers and effectively double the salary threshold below which an employee is eligible for overtime pay from $23,660 annually ($455 per week) to $47,476 annually ($913 per week).


For employers, there is plenty to think about. For those not currently tracking the hours of salaried personnel, implementing a system to track such employees’ hours may be warranted. The FLSA provides an exemption from both minimum wage and overtime requirements for bona fide executive, administrative, and professional (EAP) employees. The exemption also applies to outside sales employees and certain employees in computer-related occupations. These exemptions are sometimes referred to collectively as the “white collar” exemptions. Not-for-profits are subject to the same rules as forprofit businesses. In other words, there is no special exemption from these rules for not-for-profits. An employee’s job title does not determine exempt status under the FLSA. Additionally, receiving a salary, alone, does not exempt an employee from overtime and minimum wage protections. Thus, millions of salaried white-collar employees are not eligible for the white-collar exemptions because their duties or earnings do not meet the requirements. Such employees are entitled to both the minimum wage and overtime pay. Three tests must generally be met to claim a whitecollar exemption: (1) the salary-basis test; (2) the salary-level test; and (3) the standard-duties test. SALARY-BASIS TEST Being paid on a “salary basis” means an employee regularly is paid a predetermined amount for each pay period and is paid on a weekly or less frequent basis. To qualify as paying the employee on a salary basis, the employer cannot use variations in the quality or quantity of the employee’s work to reduce the employee’s predetermined amount of pay. Generally, the employer must pay an exempt employee his or her full salary for any week in which the employee performs any work, regardless of the number of days or hours worked; however, exempt employees do journalofaccountancy.com

not need to be paid for any workweek in which they perform no work. The prohibition against deductions from pay in the salary-basis requirement is subject to certain exceptions. For example, the employer is permitted to reduce an exempt employee’s pay when the employee is absent from work for one or more full days for personal reasons other than sickness or disability. Administrative, professional, and computer employees may be considered to be paid on a salary basis, even if they are actually paid on a “fee basis.” These employees will be considered to be paid on a fee basis if they are paid an agreed sum for a single job, regardless of the time required for its completion. The test for whether payment is on a fee basis generally looks at whether the fee is paid for a unique job, rather than for a series of jobs repeated a number of times and for which identical payments repeatedly are made. To determine whether the fee payment meets the minimum salary-level requirement to be exempt from the overtime rules, divide the fee by the number of hours worked on the job and multiply by 40 to ascertain whether the payment is at a rate that would amount to at least $913 per week if the employee worked 40 hours. September 2016 |

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New rules around overtime laws under the Fair Labor Standards Act starting on December 1st may impact the way your business clients classify and compensate their employees.


Family time or overtime.


SALARY-LEVEL TEST Under the salary-level test, an employee must be paid at least $913 per week to qualify for one of the whitecollar exemptions. Exempt computer employees may be paid at least $913 per week or on an hourly basis of at least $27.63 an hour. Under the new rules, employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary-level amount (up to $91 of the $913-per-week threshold). Such payments must be paid on a quarterly or more frequent basis to count toward the salary-level test. If an employee does not earn enough of a nondiscretionary bonus or incentive payment in a given quarter to meet the standard salary level, an employer may make a “catch-up” payment no later than the next pay period after the end of the quarter. Any such catch-up payment counts only toward the prior quarter’s salary. Employees who receive total annual compensation of at least $134,004, referred to as highly compensated employees (HCEs), are exempt from the FLSA’s minimum wage and overtime requirements if they meet a more relaxed duties test (discussed below) than is required for employees paid the standard salary level.

HCEs are exempt if they customarily and regularly perform at least one of the duties of an exempt EAP employee. Nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the $134,004 HCE total annual compensation requirement, but the employer must pay at least the full standard salary level of $913 per week on a salary or fee basis to qualify for this exemption. If an employee’s total compensation in a given annual period fails to meet the $134,004 threshold, an employer may make a catch-up payment during the final pay period or within one month of the end of the annual period. Any such catch-up payment counts only toward the prior year’s total annual compensation. If such a catch-up payment is not made within the time frame allotted, the exemption is lost for the prior quarter, and the overtime premium must be paid, unless the employee qualifies as exempt for another reason. STANDARD-DUTIES TEST Under the standard-duties test, an employee’s primary duty must be that of an exempt EAP employee. “Primary duty” means the “principal, main, major or most important duty that the employee performs.” Employees can also qualify for exemption under

WHAT RECORDS ARE REQUIRED? Every covered employer must keep certain records for each nonexempt worker. The Fair Labor Standards Act requires no particular form for the records, but does require that the records include certain identifying information about the employee and data about the hours worked and the wages earned. The law requires this information to be accurate. The following is a listing of the basic records that an employer must maintain: 1. Employee’s full name and Social Security number. 2. Address, including ZIP code. 3. Birthdate, if younger than 19. 4. Sex and occupation. 5. Time and day of week when employee’s workweek begins. 6. Hours worked each day. 7. Total hours worked each workweek. 8. Basis on which employee’s wages are paid (e.g., “$9 per hour,” “$440 a week,” “piecework”). 9. Regular hourly pay rate. 10. Total daily or weekly straight-time earnings. 11. Total overtime earnings for the workweek. 12. All additions to or deductions from the employee’s wages. 13. Total wages paid each pay period. 14. Date of payment and the pay period covered by the payment. Source: U.S. Department of Labor, Wage and Hour Division, Fact Sheet No. 21, available at tinyurl.com/hh54jps.


September 2016 |

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the special rule for HCEs, which pairs a more relaxed duties test with the higher HCE total annual compensation requirement. The following are the duties requirements for each white-collar exemption. Executive exemption. Under the standard-duties test, the employee’s primary duties must be (1) managing the enterprise or a customarily recognized department or subdivision of the enterprise; (2) customarily and regularly directing the work of at least two or more other full-time employees or their equivalent; and (3) having the authority to hire or fire other employees, or input on the hiring, firing, advancement, promotion, or any other change of status of other employees. Administrative exemption. Under the standardduties test, (1) the employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers; and (2) the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. Academic administrative personnel whose primary duty is performing administrative functions directly related to academic instruction or training in an educational institution (e.g., principals, vice principals, academic counselors, etc.) are eligible for a special alternative salary-level test that does not apply to white-collar employees outside of an educational institution. These academic administrative personnel are exempt from the FLSA’s minimum wage and overtime requirements if they are paid at least as much as the entrance salary for teachers at their educational establishment. Professional exemption. Several kinds of professional employees may qualify for the professional employee exemption. These include learned professionals, creative professionals, teachers, and employees practicing law or medicine. n To qualify as a learned professional under the standard test, (1) the employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment; (2) the advanced knowledge must be in a field of science or learning, including law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical, and biological sciences, pharmacy, and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades (which may require fairly advanced knowledge, but not in a field of science or learning); and (3) the advanced knowledge must be customarjournalofaccountancy.com

ADVICE FOR CLIENTS Employers have several ways to comply with the DOL’s new overtime rule when they have whitecollar employees who earn less than $47,476 per year: n Raise salaries and keep the employees exempt from overtime. n Pay overtime in addition to the employee’s current salary when necessary. n Evaluate and realign hours and staff workload. n Allow nondiscretionary bonuses and incentive payments (including commissions). n Change employees from salaried to hourly employees.

ily acquired by a prolonged course of specialized intellectual instruction, which means specialized academic training is a standard prerequisite for entry into the profession. n To qualify as a creative professional under the standard-duties test, the employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. This includes such fields as music, writing, acting, and the graphic arts. n To qualify as a teacher under the standard-duties test, the employee’s primary duty must be teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge, and the employee must be employed and engaged in this activity as a teacher in an educational establishment. n To qualify as an employee practicing law or medicine under the standard-duties test, the employee must hold a valid license or certificate permitting the practice of law or medicine and be actually engaged in such a practice. An employee who holds an academic degree for the general practice of medicine is also exempt if the employee is engaged in an internship or resident program for the profession. Outside sales exemption. To qualify for the outside sales employee exemption, (1) the employee’s primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) the employee must be customarily and regularly engaged away from the employer’s place of business. Computer employee exemption. To qualify for the computer employee exemption, (1) the employee must be employed as a computer systems analyst, September 2016 |


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computer programmer, software engineer, or other similarly skilled worker in the computer field; and (2) the employee’s primary duty must consist of (a) the application of systems analysis techniques and procedures to determine hardware, software, or system functional specifications; (b) the design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, based on and related to user or system design specifications; (c) the design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or (d) a combination of these duties, the performance of which require the same level of skills. Highly compensated employees: An employee with a primary duty of office or nonmanual work who meets the HCE compensation requirements is exempt if the employee customarily and regularly performs at least one of the exempt duties of a bona fide EAP employee, as described in the regulations. An employee who performs such exempt duties on an isolated or occasional basis will not satisfy this minimal duties requirement. The Department of Labor (DOL) intends to automatically update the standard salary and HCE total annual compensation levels every three years, with the next update taking effect on Jan. 1, 2020. n


TYPICAL PROBLEMS IN APPLYING OVERTIME PAY Fixed sum for varying amounts of overtime: A lump sum paid for work performed during overtime hours without regard to the number of overtime hours worked does not qualify as an overtime premium even though the amount of money paid is equal to or greater than the sum owed on a per-hour basis. For example, no part of a flat sum of $180 to employees who work overtime on Sunday will qualify as an overtime premium, even though the employees’ straight-time rate is $12 an hour and the employees always work less than 10 hours on Sunday. Similarly, where an agreement provides for six hours pay at $13 an hour regardless of the time actually spent for work on a job performed during overtime hours, the entire $78 must be included in determining the employees’ regular rate. Salary for workweek exceeding 40 hours: A fixed salary for a regular workweek longer than 40 hours does not discharge Fair Labor Standards Act (FLSA) statutory obligations. For example, an journalofaccountancy.com

employee may be hired to work a 45-hour workweek for a weekly salary of $405. In this instance the regular rate is obtained by dividing the $405 straight-time salary by 45 hours, resulting in a regular rate of $9. The employee is then due additional overtime computed by multiplying the five overtime hours by one-half the regular rate of pay ($4.50 3 5 5 $22.50). Overtime pay may not be waived: The overtime requirement may not be waived by agreement between the employer and employees. An agreement that only eight hours a day or only 40 hours a week will be counted as working time also fails the test of FLSA compliance. An announcement by the employer that no overtime work will be permitted, or that overtime work will not be paid for unless authorized in advance, also will not impair the employee’s right to compensation for compensable overtime hours that are worked. Source: U.S. Department of Labor, Wage and Hour Division, Fact Sheet No. 23, available at tinyurl.com/hwq223y.

September 2016 |

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5 ways to address the federal government’s new overtime rules By Lou Carlozo


With new rules governing overtime pay, as announced by the Department of Labor (DOL) in May, more than 4 million workers can expect their wage packages to change. Accountants must gear up to get businesses ready by Dec. 1. “Businesses need to start preparing now,” said Mike Silvio, CPA, senior director of Tax Services for Hall & Co. CPAs and Consultants in Irvine, Calif. “Those earning less than $47,476 annually will receive overtime pay when working more than 40 hours in a week—which is about double the current $23,660 limit.” Here are five ways executive teams and CPAs can prepare for the changes ahead. Review your salary and hours guidelines. “The employer is going to have to make some decisions, such as whether to increase salaries in order to have employees qualify as exempt or keep salaries the same and begin paying employees overtime,” said Catherine Wells, chair of the Employment Group at Chiesa Shahinian and Giantomasi PC in West Orange, N.J. “They may now have to track hours of employees previously exempt, or have them punch a time clock, which can be a very delicate issue to communicate.” Do a cost-impact analysis. As the overtime rules will undoubtedly change the bottom line, employers have to walk a fine line between keeping costs in check and checking in with current staff. “This is where things can become difficult if you, as a business, have not been clear about defining job descriptions, salary hierarchy, and ultimately the company’s response to the new regulations,” said William Spann, associate director, Human Resources Consulting at Postlethwaite & Netterville in Baton Rouge, La. “Without these, you’re opening yourself up to being challenged by employees and, eventually, the DOL.” Get professional help. Businesses should obtain assistance—the sooner the better—from labor law attorneys and CPAs familiar with the changes, Silvio said. “They’ll need to understand the specific criteria for workers subject to this new overtime rule. A labor law attorney can help change the employee handbook to address and reflect the changes, while a CPA journalofaccountancy.com

can help them estimate and determine the increase in payroll and payroll tax dollars.” Know the nuances and consequences. The new rules “are not a tax, but rather a change in the threshold used to determine if an employee is exempt from the federally mandated overtime rate of 1.5 times their wage for all hours worked in excess of 40 per week,” said Scott Goble, CPA, a founder and managing member of Sound Accounting PLLC in Chickamauga, Ga. Beware looking the other way: You’ll invite civil penalties, while disgruntled employees “can sue for back wages, including overtime. Add to this the fact that back wage cases can be very lucrative to the legal profession, and we find more than sufficient incentive to follow the wage and hour laws to a T.” Consider reshuffling work responsibilities. Tasks that put qualified employees into the overtime category won’t affect the hourly rate of an exempt employee or freelance contractor. “Use the rule change as a time to reevaluate and redistribute responsibilities,” said John Waldmann, co-founder and CEO of Homebase, a San Francisco-based timesheet software company.

September 2016 |