The Department of Labor (DOL) announced its publication of a final rule to update the regulations governing the exemption of certain classes of employees from minimum wage and overtime pay protections of the Fair Labor Standards Act (FLSA). The final rule, which goes into effect Dec. 1, provides for an updated salary and compensation threshold for executive, administrative and professional (EAP) employees to be considered exempt as well as provides an amendment to the salary basis test to allow employers to utilize nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new standard salary level.
The new rule sets the salary level at $913 per week or $47,476 annually. The total annual compensation for highly compensated employees (HCE) was also adjusted to $134,004. Additionally, the rule provides for an automatic update to the salary and compensation levels every three years to ensure they continue to provide effective tests for exemption.
The new salary and compensation level is an increase of 100 percent over the previous salary level, set at $455 per week or $23,660 annually in 2004. The DOL anticipates the rule to automatically extend overtime pay eligibility to 4.2 million workers and says the American worker will see more money in their pockets or more free time to improve work-life balance as a result of the measure. Furthermore, the DOL sees this change as an effort to improve workers’ health and increase productivity through improved morale and reduced turnover.
The change is not well received by many.
“We are disappointed by the Labor Department’s 100% increase to the salary threshold for overtime eligibility,” said Scott Wiley, CAE, president and CEO of the Ohio Society of CPAs, in an article on the society’s website. “This rule will impose serious hardships on public and private sector employers and employees, which will have damaging consequences for the communities they serve. We urge Congress to support legislation to rethink overtime changes that strain employers.”
Employers have time to complete internal analysis of how the final rule will impact their business prior to the Dec. 1 effective date. Staffing and budgeting decisions will need to be re-examined, and employers will need to have discussions with their employees regarding their employment classification and any impact the final rule may have. The anticipated increase in cost to employers is $1.2 billion per year in increased wages.
There are planning opportunities surrounding pay and bonus structure to mitigate the impact the final rule may have on employers. You can find an informative whitepaper report on the issue on the DOL website. You can also email Rea & Associates if you have questions about the new rule and how it will affect your business or if you need help navigating the change and implementing a plan that works for your business and employees.
By Ashley Matthews, CPA (Dublin office)