February 2/10, 2020: Volume 35, Issue 16
By Roman Basi
If your business employs a large amount of full-time, overtime-exempt employees earning between $23,660 and $35,308 annually, it’s time to reevaluate overtime liability. The U.S. Department of Labor recently announced a new rule prescribing new standards and threshold necessary to exempt executives, administrative and professional employees from overtime requirements under the Fair Labor Standards Act (FLSA).
The basic changes include:
- Raising the standard entry level from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker.)
•Raising the total annual compensation requirement for highly compensated employees from the currently enforced level of $100,000 per year for a full-year worker.
•Allowing employers to use nondiscretionary bonuses and incentive payments (including commission) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices.
These changes went into effect Jan. 1. As a result of the legislation, the Department of Labor estimates 1.3 million workers will become entitled to the new overtime benefits and protections.
So, how does an employee qualify for overtime exemption under the new rule? The agency’s regulation specifies three general requirements an employee must satisfy to qualify for overtime exemption. These requirements are as follows:
- The employee must be salaried, meaning 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. This is known as the “salary basis test.”
- The employee must be paid at least a specified weekly salary level, which is $684 per week (the equivalent of $35,568 annually for a full-year worker) under the final rule—i.e., the “salary level test.”
- The employee must primarily perform executive, administrative or professional duties, as defined in the Department of Labor’s regulations (a.k.a. the “duties test.”)
The new law includes several defensive strategies for employers seeking to avoid violation. The regulation will allow employers to meet the annual compensation threshold of $35,568 by eliminating the requirement that such compensation be based on salary. For example, an employer can offer the employee bonuses or commission to exceed the threshold and, therefore, exempt them from overtime pay. Another option available to employees is “catch-up payments.” Meaning, if at the end of the 52-week period the employee has not earned enough through nondiscretionary bonuses or incentive payments, the employer may make a catch-up payment to accommodate for the difference.
If you employ a workforce with employees who are exempt from overtime under the current FLSA standards, this new rules bears significant importance. For guidance, contact the Center for Financial, Legal & Tax Planning at 618.997.3436.
Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He writes frequently on issues facing business owners. Please visit taxplanning.com for more information on succession planning and other business concerns.