Smit Shah, CPA
10.13.2016 | Client Alert
The House of Representatives has passed a bill that would delay passage of the new overtime regulations by six months. President Obama has threatened to veto this legislation. We believe it is prudent to prepare for the regulations as if they will go into effect as of 12.1.16.
Effective December 1, 2016, new overtime regulations stipulated by the Fair Labor Standards Act (FLSA) signed in May 2016, will go into effect that will increase wages for many employees in the work force. These new rules effectively double the federal overtime limit, meaning millions of lower- and middle-class employees will be eligible for overtime pay. The rules will have a tremendous impact on the hotel and restaurant industries, where wages are historically low, over-time is historically high, and profit margins are slim.
Currently, the rules affect employees with annual income below $23,640 ($455 per week). That threshold will be raised to $47,476 annually for a full-year worker ($913 per week) and automatically updated every 3 years based on wage growth. An employee who earns annual salary income below $47,476 and does not qualify as exempt will be entitled to overtime pay at time-and-a-half for over 40 hours per week. Most affected will be small businesses with a significant number of low-income employees including those in the retail, restaurant, and manufacturing industries.
Consider these industry statistics from a variety of industry job sites:
- The average U.S. wage for chefs, head cooks, and pastry chefs is $45,920.
- Bakers in NY earn an average of $34,000, far above the national average of $26,000 but still far below the new threshold set by the federal government.
- Culinary journalists (reporters and editors who cover the industry) earn a mean wage of $46,560 nationwide.
All employees in these categories will now qualify for time-and-a-half overtime pay for extra hours.
There are three tests that need to be met for an employee to qualify as an exempt employee and not fall under the overtime regulations. Known as the “white collar” exemptions, they are:
- The Salary-basis test. If the employee is paid a predetermined amount of salary each pay period, he/she usually will be paid full salary each week regardless of the number of days worked.
- The Salary-level test. The employee must make at least $47,476 annually ($913 per week) to qualify. Employers can use non-discretionary bonuses and incentive payments to satisfy up to 10% of the threshold ($91 per week).
- The Standard-duties test. The employee’s main duty falls under the categories of executives, administrators, professional employees, outside sales employees, or computer-related occupations.
Employers can comply with the new standards in a number of ways:
- Give certain employees a raise: Increase the salary over the threshold of those employees who otherwise meet the above “white collar” exemptions. The Department of Labor (DOL) notes that giving raises is an acceptable method to comply with these new regulations.
- Allow the non-discretionary bonuses and incentive payments to satisfy up to 10% of the threshold ($91 per week).
- Change employees to hourly instead of salary and pay overtime where required based on hours worked.
- Pay overtime wages.
Employers can also prepare for the new standards in a number of ways:
- Make a list of current exempt employees earning salary below $47,476. There will be a need for a system to track attendance and time these employees work to enable employers to run real time reports on hours worked.
- Consult with a labor law attorney and update the employee handbook to reflect these changes.
- Consult with a CPA to evaluate additional payroll expense and related payroll taxes that may be incurred.
- Re-evaluate roles of current staff and possibly change work responsibilities. Perhaps you will find that some of the overtime hours can be shifted to employees who are already exempt.
- Possibly change non-exempt employees to exempt by redefining job descriptions.
- Instruct employees not to work more than 40 hours a week and utilize part-time workers for the additional work.
Employers may also consider implementing the “fluctuating workweek method,” where employers pay non-exempt employees a flat salary, as long as that salary is sufficient to provide employees with at least the minimum wage for all hours worked every work week. There are advantages and disadvantages to this method: Your employee earns his/her salary regardless of the number of hours worked during a given week, whether that is 20 or 50. No additional pay is due if a work week exceeds 40 hours. It is important to know, however, that the DOL looks upon this method with suspicion should you face a DOL audit. In addition, not all states recognize use of the fluctuating work week.
The new standards are estimated to affect at least 4.2 million American workers. Businesses should start planning now by getting familiar with the new regulations and how they will affect their business, their employees, and their bottom line.
Despite some skepticism, the new regulations are not likely to prompt hotel and restaurant employers in major markets like New York to cut staff. New York restaurants are always crowded, and in this industry, good help is hard to find. The more likely scenario is that hotel and restaurant patrons will continue to see an increase in their food and lodging tabs.
Questions? Contact your Berdon advisor or Smit Shat, CPA, Berdon LLP, New York Accountants