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• How New Federal Overtime Laws Can Affect Your Small Business Taxes
• How New Federal Overtime Laws Can Affect Your Small Business Income

However, the changes may be felt by more than just the workforce. If you are a small business owner, for instance, let’s look at how Obama’s new overtime rule could affect you. As a small business owner, the current scale you use to pay your workers may need to be re-evaluated. Prior to the new rule, business owners could exempt executive, professional and administrative workers from overtime pay if they earned a salary of not less than $455 per week. 1, 2016, though, this exemption number jumps to $913 per week. For some small businesses, the new overtime rule will not affect them. Beginning in December, about 4.2 million more Americans will qualify for overtime pay under new rules from the U.S. Department of Labor. If you own a small business and have full-time employees.

Beginning January 1, 2020, small businesses will have to comply with a new overtime rule, estimated to affect 1.3 million workers. The new rule requires that exempt salaried employees must be paid at least $684 per week, or $35,568 annually.

Changes to overtime laws, which can impact a small business’s finances, HR policies and employee classifications, went into effect in 2016. Here is what you need to know about the law and possible solutions for your small business.

Facts

The Fair Labor Standards Act

As a small business owner, you’re familiar with the Fair Labor Standards Act (FLSA), but as a primer for the new law, here are the basics.

First put into effect in 1938, the FLSA established minimum wage, overtime pay and child labor laws. Today, it requires employers to pay at least a minimum wage for up to 40 hours per week and pay overtime for hours in excess of 40.

The FLSA applies to employers whose annual sales total $500,000 or more or engaged in interstate commerce. These two criteria mean almost all workplaces must abide by FLSA laws.

The Final Rule

The Final Rule are the changes to the FLSA that go into effect in December. The Rule primarily entails changes in the criteria of recognising FLSA-governed employees as exempt or nonexempt.

Employees categorized as nonexempt employees are entitled to overtime pay; exempt employees are not.

The Final Rule doesn’t change FLSA laws, it simply raises the salary threshold for those recognized as exempt. FLSA says the salary level for exemption status is $455 per week or $23,660 per year. The Final Rule raises this threshold to $913 per week or $47,476 per year. Automatic updates to those thresholds will start in January 1, 2020 and occur every three years.

Employers are also now allowed to satisfy up to 10 percent of the standard salary requirement with commissions, incentive payments and nondiscretionary bonuses, provided these are paid at least quarterly.

Challenges

These new laws lead to some problems, mostly in terms of resources and expenses.

The Department of Labor estimates that the changes will increase employee compensation by $1.2 billion a year. The law impacts about 40 percent of workers.

Regardless of the route businesses take, these changes will result in an increased expense for employers.

Solutions

The Final Rule changes don’t dictate which actions employers must take. The Department of Labor anticipates at least five possible responses employers may take:

• increasing an employee’s salary to maintain their exempt status
• paying the premium for overtime hours
• reducing or eliminating overtime hours
• reducing pay allocated to base salary and adding pay for overtime hours to keep total weekly pay constant
• using a combination of these responses

How New Federal Overtime Laws Can Affect Your Small Business Taxes

What does this mean for your small business?

Small businesses have options for how they’ll implement these new regulations. Here are a few ways to approach the changes.

Increase salaries

• If budget allows, a small business can choose to increase salaries for employees so they meet the new criteria.
• Since employers are allowed to satisfy up to 10 percent of the salary requirement with commissions, etc., small businesses can introduce a variable comp plan for certain results-driven positions to make up the difference.

Move employees’ statuses

• Alternatively, employers can choose to move the employees’ statuses from exempt to nonexempt. However, this will require increased administrative work, since employers will now need to track the hours worked and pay time-and-a-half for any overtime hours.

Implement automation tools

• Small businesses may consider taking steps to reduce increased human resources and managerial costs by using automation tools to streamline.
• Employers should make sure they have the administrative bandwidth to calculate and manage hours for nonexempt employees, if they choose to go that route. Using automated timesheet processing can reduce the managerial cost of monitoring employee overtime.
• A combined small business payroll and accounting software solution can help you track all your employee-related expenses down to the penny, every time you run payroll.

Outsource

• Employers who are forced to cut employee overtime hours may also consider pursuing automated or outsourced solutions to make up for lost productivity or reduced customer service capability.

Small businesses can take a strategic approach and really look at this employee by employee to determine which option makes the most sense given the employee’s role and current salary.

Because labor is often the number-one cost for small businesses, understanding how payroll impacts profitability is critical to your success. As small businesses plan out the new year, be sure to allocate sufficient funds for this increased payroll expense.

Federal Overtime Changes Ahead for Small Businesses

If your small business currently employs workers who are exempt from overtime pay, the recent presidential memorandum signed by President Barack Obama requesting changes to overtime regulations could mean your company’s payroll amounts may increase by 2015 or 2016.

In this memorandum, the U.S. Department of Labor (DOL) was directed to devise new federal overtime rules that would change employer’s wage and hour obligations under the Fair Labor Standards Act (FLSA) in determining which employees are considered exempt from overtime compensation. Basically, these new regulations, if put into place, will make more “white-collar” workers eligible for overtime pay (typically at one-and-a-half times the employee’s regular rate) for all hours worked over a 40-hour workweek.

While the memorandum doesn’t spell out exactly what the changes will be, per the President’s directive, the DOL will likely make changes to the minimum salary and primary duty requirements within the regulations.

• Minimum salary requirement – The DOL is expected to increase the minimum salary used in determining overtime exemptions. Currently, an employee must make at least $455 a week ($23,660 annually) to be considered exempt from receiving overtime pay. In 2004, the last time revisions were made to the FLSA overtime regulations, the minimum salary requirement was raised from $250 a week to the current $455. According to a White House fact sheet, $455 in 2004 would equal $561 in today’s dollars. And if the $250 minimum, set in 1974, was indexed to today’s standards, the minimum salary basis would be about $1,000 per week now.
• Primary duty requirement – This requirement dictates the main duties an employee must perform to be considered exempt from overtime pay. The DOL could replace this requirement with a “percentage of time” test which may require an employee to perform exempt duties over 50% of their weekly time spent working.

While these changes are intended to help the middle class per the President, many fear these changes may have negative consequences on economic growth. Employers may:

• Convert salaried exempt employees to hourly employees.
• Pay lower hourly rates to account for expected overtime or performance-based incentives, like commissions and non-discretionary bonuses, that must be included in overtime calculations.
• Reduce performance-based incentives.
• Prohibit exempt employees from working overtime or place strict limits on the amount of overtime allowed.
• Increase the number of part-time positions while decreasing full-time positions.

In the meantime, changes to federal overtime rules won’t happen overnight. Before the final regulations can be put into place:

1. The DOL will draft its changes.
2. A public comment period will take place.
3. The DOL will make revisions to their draft based on the public’s comments.

This rulemaking process could take 12 to 24 months before completion.

Once The Payroll Department learns of the DOL’s proposed rule changes, we’ll let you know in a future blog post. Meanwhile, if you have any questions about current FLSA overtime rules for exempt employees and how they affect your workplace payroll, contact us at (317) 852-2568.

How New Federal Overtime Laws Can Affect Your Small Business Income

-Teresa Ray, Owner, The Payroll Department

Posted in:News, Operating a Small Business, Payroll, Payroll Processing, Rules, Regulations and Laws

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