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New overtime regulations are in effect for 2020, extending non-exempt status to more than one million American workers. The new rules could have a profound impact on your payroll budget, so it’s crucial to review recent changes and make necessary adjustments to avoid overpaying and the potential for costly penalties. Here’s what you need to know about 2020’s new overtime pay rules, plus steps you may want to take to prepare your company for compliance.

Editor’s note: This blog post is not intended to be tax advice. Always check with your legal counsel or tax adviser about your specific situation.

What are the new overtime pay rules?

Per the U.S. Department of Labor and the Fair Labor Standards Act (FLSA), the following changes are in effect as of January 1, 2020:

  • The overtime exempt salary threshold has increased
  • The required minimum annual salary for the highly compensated employees exemption has increased
  • To be considered exempt from overtime, employees must meet the salary threshold and pass duties tests (more on that below)
  • Employees who do not meet the salary threshold or pass duties tests may need to be compensated at 1.5 times their normal hourly rate for any time worked over 40 hours in a week
  • In states that have their own overtime laws, employees who work overtime must be compensated at the higher rate between federal and state regulations
  • Incentive payments such as commissions and nondiscretionary bonuses can count for up to 10% of employee salary
  • The special exempt salary threshold has increased for certain employees

Is your business subject to FLSA overtime laws?

These laws typically apply to a broad swath of businesses, including but not limited to

  • Any business that does at least $500,000 in annual revenue.
  • Any business that engages in interstate commerce, produces goods for interstate commerce, or handles, sells or works on goods or materials that have been moved in or produced for interstate commerce.

There are some exceptions including hospitals, senior-care or disabled-care facilities, schools and universities, and government agencies.

That’s a rather broad spectrum, and many businesses are subject to FLSA overtime laws. Always consult with your legal counsel to determine if your business is subject to FLSA overtime laws.

Domestic service employees (housekeepers, home health aides, gardeners, nurses, etc.) who work in private homes and earn $2,200 or more — or work 8 hours per week — are also covered by FLSA overtime laws.

Who is exempt from overtime pay?

Employees exempt from overtime compensation typically must both meet the salary threshold and pass applicable duties tests. Sometimes referred to as “white collar exemptions,” these tests evaluate whether a given employee’s job description qualifies them for exempt status. There are five types:

  • Executive: Primary job duties typically include managing the business and overseeing other employees, among other responsibilities.
  • Administrative: Primary job duties typically include office or non-manual work.
  • Professional: “Learned professional” primary duties typically include work that requires advanced knowledge that is intellectual in nature, where that knowledge is acquired through specialized instruction. “Creative professional” primary duties typically include work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
  • Computer: Primary duties typically include the application of systems analysis techniques to determine hardware or software specifications; or the design, development, documentation, analysis, creation, testing or modification of computers systems.
  • Outside sales: Primary duties typically include making sales or obtaining orders/contracts for services and they must regularly engage with customers away from the employer’s place of business.

In addition, highly compensated employees who perform office or non-manual work are usually exempt from overtime pay, provided they perform at least one of the duties of exempt executive, administrative or professional employees. Additional details can be found on the Dept. of Labor’s website.

Other types of employees are exempt from overtime, including:

  • Certain commissioned sales employees
  • Drivers, loaders and mechanics employed by motor carriers and whose duties affect safe vehicle operation
  • Farmworkers
  • Certain seasonal and recreational employees
  • Airline employees
  • Railroad employees

You can find a complete list of less common exempt employee types on the Department of Labor’s website.

Again, your legal counsel can help you determine which if any of your employees are exempt from overtime pay.

What if state overtime laws differ from federal laws?

If you’re in a state that has its own overtime laws, then overtime compensation usually must be the greater of the federal or state rate. In addition, overtime compensation typically kick in at the lowest hourly regulation. For example, assume your state law mandates that overtime must be paid for any time worked over 46 hours per week. However, federal law dictates that overtime must be paid for time worked over 40 hours per week. In this case, federal law would supersede state law, provided your employees are covered by the FLSA.

What if states require overtime pay after 8 hours?

Even though federal regulations do not address daily overtime pay, you’re usually subject to pay it if your state requires overtime pay after 8 hours.

Can an employer refuse to pay overtime?

In most cases, no. Exceptions are both rare and difficult to prove.

No matter how you feel about a given employee’s overtime hours, it’s in your best interest to pay. That’s because refusal to pay overtime can result in severe penalties, including:

  • Fines and civil penalties that can reach thousands of dollars
  • Criminal prosecution, with a second conviction resulting in imprisonment
  • Back pay paid to employees PLUS “liquidated damages,” which is essentially double the back pay owed

Note that company employees, including managers, can be held liable for overtime pay violations for up to 3 years.

What should you do next?

The new overtime rules are already in place, so you need to ensure your business complies as soon as possible to gain control of your payroll budget and avoid potential penalties. Prepare your business by taking the following steps.

1. Identify affected employees

Review employee records, job descriptions and hours worked to identify who is impacted by the new rules. Make a list of employees who have shifted from exempt to nonexempt. Detail how many hours each employee works per week, and how many of those hours result in overtime pay. Compare their job descriptions to the federal duties tests to see if opportunities exist to reclassify employees. Identify exactly what impact the new overtime laws will have on your bottom line, then move on to the next step.

2. Consider job description revisions, pay increases or hiring additional personnel

Evaluate each employee who will shift from exempt to nonexempt and the impact it will have on your payroll budget. Weigh the following options to see how each might limit payroll expenses:

  • Revise job descriptions: Review the duties tests for executive, professional and administrative employees to see if you need to alter language so they’re exempt under the new laws
  • Increase pay: Determine whether you’ll realize greater savings if you increase salaries to make employees exempt or if you’re better off paying overtime based on historical hours worked
  • Hire additional personnel: Determine whether it would be cheaper to hire additional personnel to eliminate overtime pay

When you compare your options, you’ll be able to identify ways to minimize the impact overtime law compliance has on your payroll budget.

3. Develop an employee communication plan

If you make changes to your workforce, including revised job descriptions and additional hires, it’s important to communicate to employees that the changes are due to new government regulations and not a reflection of their status with the company. You don’t want employees to feel as though they’ve been devalued or demoted.

For many companies, a goal might be to maintain current employee compensation levels and still comply with government mandates, though that might be impossible to do in some cases depending on the amount of overtime a given employee works.

4. Implement new policies, procedures and training programs

Depending on how you classify employees under the new regulations, you might need to adjust policies and procedures. For example, you might develop a formal process for overtime pre-authorization. Or, you might need to train employees who are now responsible for tracking their hours electronically.

Determine whether exempt and nonexempt employees have different policies, and if so, make sure you properly communicate the reasons why to avoid an unhappy workforce. For example, if exempt employees are allowed to work from home and set their own hours while nonexempt employees must clock in at a certain time on-site, you need to be able to justify this decision.

Train all employees, managers and supervisors on proper time tracking, overtime authorization and new policies to facilitate a smooth transition. This is also an excellent time to update your employee handbook and make sure that all employees and supervisors have a current copy and understand the policies.

5. Simplify tracking, reporting and compliance

Accurate hourly tracking and reporting are critical to compliance, but manually tracking all employee hours, attendance and overtime compensation can be complicated and cumbersome. Excel spreadsheets are prone to human error and make it difficult to see the big picture. As regulations get more complicated and penalties more severe, now might be the time to partner with a payroll service that can help you comply with overtime laws and make the transition easier.

Your payroll and HR service partners, like Deluxe Payroll, can be invaluable resources in helping your company address the new federal regulations as well as maintain compliance with local and state laws. If you have questions about the overtime pay changes or want help tracking employee time, attendance and overtime hours, Deluxe Payroll is here to help.

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Editor’s note: This blog post is not intended to be tax advice. Always check with your legal counsel or tax adviser about your specific situation.

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