- How New Federal Overtime Laws Can Affect Your Small Business Taxes
- How New Federal Overtime Laws Can Affect Your Small Business Account
- How New Federal Overtime Laws Can Affect Your Small Business Tax
- How New Federal Overtime Laws Can Affect Your Small Business Income
The Federal Overtime Rule change, taking effect on December 1, has provided very specific legal requirements for small business owners, the most relevant being the increase in the standard salary level. In Priori’s first article on this change to the Fair Labor Standards Act, we outlined the specific legal implications of the change and how they impact small businesses. But what are the more practical implications of the change?
Changes are Opportunities
How do overtime rules affect small businesses? If your business is covered by the FLSA, you must pay an overtime-eligible employee in “time and a half” pay for overtime hours. Covered businesses are generally those that have an annual gross volume sales or business of $500,000 or more. Beginning in December, 2016, about 4.2 million more Americans will qualify for overtime pay under new rules from the US Department of Labor.If you own a small business and have full-time employees.
The change in the overtime rule is a wonderful opportunity to review employee status without raising eyebrows at the Department of Labor and triggering an audit. Use this opportunity to review not only the salary levels of exempt and non-exempt employees to comply with the new rule, but also to review the duties test for each exempt employee. Remember that in order for an employee to be classified as exempt, they must pass both the duties test and the salary test. You can also use this rule change as an opportunity to review the status of your independent contractors to ensure that they meet the three-factor federal test to qualify for that status. If not, you may need to move them to employee status. In performing your review, check not only against federal rules but also against state rules, which can sometimes be more stringent. Reviewing all these potential liabilities and correcting them quickly and together reduces your risk of audit, and lets you move forward in your business with peace of mind.
- How the New Federal Overtime Rules May Impact Your Small Business Posted on June 26, 2016 July 18, 2016 by Sylvia Lagerquist, CPA The U.S. Department of Labor (DOL) has announced a revision to the standards for overtime pay under the Fair Labor Standards Act (FLSA), and the update has the potential to dramatically impact small businesses.
- Federal wage laws apply to every business, no matter how small. So as a small business owner, you’ll need to keep on top of the wage and hour rules and regulations. Several recent changes in federal wage laws, especially overtime rules, may have an impact on your small business – let’s take a look at the current landscape of federal.
If you have employees who you will be moving from exempt to non-exempt status, review your financial options thoroughly with the input of both your finance and Human Resources teams before changing your employees' status. Here are three options to consider that can help to control costs:
- Limit Overtime. In many cases, if an employee has worked limited overtime in the past, simply changing them from exempt to non-exempt status may be a reasonable option, provided you also put policies in place that keep overtime to a minimum.
- Use the DOL’s Cost-Neutral Formula. The Department of Labor has approved the 'cost-neutral solution,' where you calculate a new hourly rate for the employee that includes a consideration of their overtime hours. To do so, use the following formula: Weekly Salary/(40 + (Overtime Hours x 1.5)) = New Hourly Rate.
- Include incentive pay. Finally, the new provision also allows for the use of nondiscretionary bonuses – incentive payments and commissions that make up to 10% of the salary requirement for the exemption basis, provided that this is paid at least quarterly.
When considering financial models, make sure to include all applicable taxes that may apply to increased wages as well as the wage and exemption requirements at the state level.
Another way to reduce cost while complying with the Overtime Rule change is to change internal policies in a way that supports the reduction of hours overall. These policies could include:
- Requiring a manager’s prior approval on any hours worked outside of the office and/or the employee’s regular schedule, which would include checking email or taking phone calls;
- Limiting or terminating access to work email and phones outside of the office (such as on personal devices or on company devices), so employees cannot work overtime outside of the office; and
- If an employee is required to work overtime on a day planned in advance, you may be able to require them to take time off later in the week to off-set the cost.
In all of these cases, the policy changes should be checked against state and local municipality laws, as they are only allowed in certain instances. However, it is important to note that even if an employee breaks one of your new policies intended to limit overtime hours and works overtime hours, they are still entitled to overtime pay for the hours worked.
Systems of Support
Molly moon books. In addition to thinking about the ways that you can limit overtime costs for your small business, you also need to think about the systems of support needed to ensure you stay in compliance going forward. The following are the minimum systems you should have in place:
- Wage and Hour Policies. Ensure that your Employee Handbook has policies in place that require the recording of all hours, and also spells out each employee’s rights to meal and rest breaks under the law. Every employee should be required to sign a Handbook Acknowledgement Receipt that indicates they have read and agree to abide by these policies. This will provide excellent support if you ever face a Wage and Hour violation.
- Time-Tracking System. In addition to providing employees their rights and requirements with regard to time, you must also keep detailed records of the time each employee works. Use a simple web-based tool such as Harvest or Toggl, or ask your payroll company if they have a product that will automatically feed into your payroll.
- Wage Notices. Most states have a wage notice requirement, meaning you must notify an employee of changes to their pay in advance of such changes. The most common is a seven-day notice period, but for some states it is as long as 30 days. With the December 1 implementation deadline for the Overtime Rule, ensure you leave yourself enough time to give the proper notification (especially keeping in mind that the Thanksgiving holiday is one week before the deadline).
- Labor Posters. Review your labor posters to ensure they mention the difference between exempt and non-exempt employees (and check the minimum wage and date of notice while you’re at it). This will help prove you have informed employees of their rights under the law.
Each of these systems can take time to implement, so be sure to leave yourself enough time to build and roll-out the systems in advance of the December 1 deadline.
Communication is Key
Communicate with employees early and often about changes to their classification and wages. This is the best way to ensure that these changes do not impact culture. When crafting your employee communications, consider:
- Notify employees of changes that will affect them, but only once you are sure they will affect them. Giving only partial data, or sending out a blanket email that includes those that may not be affected, will only lead to confusion, speculation and a degradation of the trust between employees and management.
- Be clear about why and when changes are being implemented. Most employees are more comfortable with changes when they are given plenty of notice. Similarly, understanding why they are impacted is key to continuing to build trust with the employee and your employer brand, separating legal requirements from your company culture.
- Be sensitive. Many employees see being classified as non-exempt as being “junior” or “administrative” while they see being exempt as being “professional” or “managerial.” Be aware of this mental distinction, and make clear in all of your communications that the exempt or non-exempt status of an employee has no bearing on their opportunities for advancement or their value to the team.
Craft all communications in line with your employer brand and company culture, as well as legal requirements. Be sure to treat all effected employees equally (same amount of notices, etc.) to create an open and transparent environment, as well as to protect your company from claims of discrimination.
Considering all the factors required to comply with the Overtime Rule change thoroughly and accurately can be time-consuming. But taking the time now will reduce your risk of future litigation and monetary loss considerably. Move forward in partnership with your legal, finance and HR teams to ensure you have peace of mind knowing your business, and employees are cared for and safe.
Does The New Overtime Rule Affect My Business?
Will the new overtime rule affect your business? The U.S. Department of Labor announced a final overtime rule that will make 1.3 million workers eligible for overtime pay under the Fair Labor Standards Act (“FLSA”). This new overtime rule goes into effect on JANUARY 1, 2020. There is no exemption for small businesses.
Do You Have Employees?
If you have employees then, YES, the new OVERTIME rule applies to you! The new year will be here before we know it, so you better jump on this. Here’s the deal with this new overtime rule:
- You can no longer pay a “salary” to ANY employee who makes less than $35,568 per year for a full-year worker;
- You may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the $35,568 amount;
- Former salaried employees MUST now clock in and out;
- Employers MUST keep record of employees work time; and
- Any hours worked over 40 in a week MUST be paid overtime, time and a half for hourly employees.
Thus, these salaried employees are not considered “exempt” anymore but are now paid by the hour. This law could blindside many small businesses here in Utah. Today is the day to face this so you are not one of those caught with overtime violations and penalty fees for non-compliance. Ignorance of the law will not save you!
How New Federal Overtime Laws Can Affect Your Small Business Taxes
Where Should You Start?
Follow these steps to protect your business:
- Identify those employees who have been paid a salary (include any bonus or commissions) that is less than $35,568 a year;
- Calculate the actual hours these employees work per week. Hopefully, these employees have kept a record otherwise, you will have to estimate.
- Determine how much these employees will earn yearly when you have to pay them overtime at their current rate of pay. This is important to figure out to ensure your labor costs remain the same.
You Have Three Options To Consider
Here are your options to consider:
How New Federal Overtime Laws Can Affect Your Small Business Account
- Reclassify each employee from salary to hourly. Decrease the hourly rate to reflect the expected overtime hours, thus keeping your labor costs the same.
- Reclassify each employee and prohibit them from working overtime. If any employee works overtime without authorization, you still have to pay them overtime. While you will reduce costs, you will lose the extra hours each week these employees have worked above 40 hours.
- Reclassify each employee without decreasing hourly rates, pay the overtime which essentially gives the employees a raise so your labor costs will go up.
How New Federal Overtime Laws Can Affect Your Small Business Tax
In order to maintain an employee’s “exempt” status from overtime, you must pay that employee $35,568 a year AND the employee must meet certain tests regarding their job duties. Job titles do not determine exempt status. There are three main exemptions available: Administrative, Executive and Professional. To qualify for the administrative exemption, the employee’s primary duty must be the performance of office work directly related to the management of the business and the employee has authority to exercise discretion and independent judgment with managing the business. For example, an “Office Manager” may not have discretion to hire and fire employees, so even though the title implies that the job is directly related to the general business operations, without authority to hire and fire, this office manager would not qualify to be a salaried employee.
This is another headache for the Small Business owner as the Department of Labor has not only changed the overtime rule but the potential penalties can be detrimental if you get it wrong. Protect your business and avoid making a mistake with overtime. Get in touch with us for more details. You’ll be surprised how easy it is to work with us!