As a small to mid-size business owner, your list of to dos is never ending. Somewhere between hiring employees and delivering on your corporate mission comes a little thing called payroll. How is your company currently handling compensation? Before your employees can start logging hours, you need to make payroll distribution a top priority to ensure that everything runs smoothly and that your employees are getting the proper compensation in a timely manner.
Payroll is a complex process that includes many things beyond writing and distributing checks. Filing government-mandated forms, paying taxes, and most importantly, making sure your employees get the compensation they’re entitled to are just a few of the issues that come to mind when we tackle payroll as a small/mid business. With so many factors to consider, paying close attention to detail is essential to preventing mistakes.
This year business owners are in a unique situation as new rules are being adopted regarding overtime compensation and the current definition of exempt and non- exempt employees. If you are not clear about the latest regulations, you will quickly find yourself managing higher than expected labor costs – clearly something not any business can afford as it plans for growth.
Below is our “cheat sheet” on how to navigate federal and state overtime requirements.
Last year, the Department of Labor (DOL) announced new proposed changes to the overtime exemptions under the Fair Labor Standards Act (FLSA). The proposed timing for the new changes could become effective sometime this summer or early fall. The DOL estimates that as many as 4.6 million workers could become eligible for overtime under the new changes, Depending upon the number of employees in your organization, your bottom line could take a significant hit.
As you know, currently hourly employees get time-and-a-half after 40 hours of work a week. That is not always the case. Employees must be paid according to all the other mandates of the FLSA and the state law in which they work. A common mistake among many small to mid-size business owners is to grant compensatory overtime (time off) instead of paying overtime. In most situations, this is illegal. In addition, many employers often fail to calculate overtime at 1.5 times the employee’s regular rate of pay, which includes their hourly wage an plus other forms of compensation. To be compliant, you need to make sure you’re following your state’s Wage and Hour regulations. They may be more generous than the federal rules.
The FLSA requires covered employers to pay “non-exempt” employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. While most employees are non-exempt, the FLSA includes exemptions for certain administrative, professional, executive, highly compensated, outside sales, and computer professional employees. These employees are known as “exempt” employees and are not entitled to the FLSA’s protections.
Do Your “Exempt” Employees Pass the Test?
To be considered exempt, employees must generally satisfy three tests:
1. Salary-level test (currently, $455 per week for the executive, administrative, professional employee exemptions*)
2. Salary-basis test (receive their full salary in any week they perform work, regardless of the quality or quantity of the work)
3. Duties test (the employee’s primary duty must meet certain criteria)
Under the proposed rule, the salary threshold for the executive, administrative, and professional employee exemptions would be set at the 40th percentile for full-time, salaried employees using data published by the Bureau of Labor Statistics (BLS). In 2016, the DOL projects this amount to be about $970 per week (or $50,440 per year).
The current salary threshold for highly compensated employees is $100,000 per year, but that may also increase. The proposed rule would raise the salary threshold for highly compensated employees to the 90th percentile, which was $122,148 in 2013. This amount is likely to increase by the time a final rule is published.
Properly Prepare Your Business
- Review all exempt classifications to ensure that employees still qualify under the existing duties tests.
- Double check the status of your exempt employees to determine if they fall below the new proposed salary threshold before the rules become final. If they do, you have two options: 1) reclassify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a week, or 2) raise their salary to meet the new requirement. Be sure to budget for salary increases and/or overtime costs.
- It is possible that some states will update their salary threshold as well. If this is the case, covered employees must comply with the higher minimum salary requirement.
Armed with this cheat sheet, we hope that you and your business will have all the information you need to prepare payroll for your unique business situation. Did you know that your Windfall membership gives you access to member-only prices on payroll services through industry leader ADP? Learn more today!
Not a Windfall member? Windfall partners with the best in the business to offer their members Windfall only pricing on everything from office supplies to hotels! The best part is that these savings are passed onto you at no cost! Your Windfall membership is free – sign up today.