In a 2014 newsletter, we (executive advantage) discussed the presidential order to the US Dept of Labor (DOL) to update the regulations governing exemptions for overtime. To recap the current regulations for those less familiar with HR:
- Overtime isn’t required for certain positions, assuming the pay is at least $455.00 per week.
- These positions are not defined by title as much as by job duties. (Please note that we’re discussing administrative/management positions.)
At that time, we (ea) are predicting the threshold would land somewhere nearer to $600. (After all, one of the rules of change management is to introduce change in manageable increments.) Yesterday (June 30), the DOL published its proposed number – double the current threshold, or $921/wk – to be updated annually. (See the side bar for a description of proposed changes.)
This morning’s Kansas City Star opens with: “Retailers and manufacturers blasted President Barack Obama’s plan to make more Americans eligible for overtime pay, saying the move would stunt workers’ careers and cost companies billions.” It cites the National Retail Federation which insisted that the proposed rule “would force companies to use more part-time and entry-level workers” and a post on the White House website “A hard day’s work deserves a fair day’s pay, that’s at the heart of what it means to be middle class in America.” (See: http://www.kansascity.com/news/business/workplace/article25882903.html)
Despite posturing in papers and websites, now that there are finally some long-awaited ballpark numbers, what should be your response? First, note that the rule isn’t finalized. The government is taking public comment at www.regulations.gov (Please note your comments will go on public record.) Second, preliminary analysis indicates about 50% of employees with a management, administrative or professional exemption might now become ineligible for overtime. We’ve been keeping an eye on this for our clients and have a grip on what might need to happen next. If you’re not a current client, consider that roughly 25 -50% of your employees might be affected. You may want to meet with us to consider the potential impact to your organization as well as strategies for managing the impact of this rulemaking. (Remember we’re not talking about just paying overtime, but also time recording, or FLSA regulations.)
~Bob & Doris Scribner
DOL is proposing updates to existing regulations governing overtime exemptions for executive, administrative and professional employees. The stated purpose of this proposed rule is to simplify the identification of nonexempt employees, making compliance with overtime rules clearer and easier.
To this end, DOL proposes to increase the salary level required for exemption, assuming that most of the areas of misidentification of exemption lie in the below $50,000 range.
- Set the weekly earnings level for full-time salaried exempt workers at $921.00;
- Set the weekly earnings level for highly compensated employees at the 90thpercentile of weekly earnings of full-time salaried workers ($122,148 annually);
- Update the amounts on an annual basis.
Subcontractor/Contractor and Economic Realities – A Simplified Look
In layman’s terms, the question is often “Do I W-2 this person or 1099 him?” Basically, we’re asking is the individual performing work on behalf of a company an independent contractor or an employee? It’s an age old discussion we, as many HR professionals and accounting/bookkeeping personnel have had with employers over the years. The real question to the government is, “Do I get my payroll taxes upfront, or can I trust this ‘independent contractor’ to pay his income taxes?” Again, this is perhaps oversimplified, but the essence of the issue.
In the past, the “ruler” to determine this was the IRS 20 factor test which focused more on who controlled the individual’s work – the contracting company or the individual himself. The “ruler” still required interpretation, but the issue was “who controls the individual’s work”. The new interpretation (already in force without room for comment by the general public, unlike the DOL exempt threshold discussion in this section) gives greater weight to another ruler, the economics reality test, or the extent to which the work performed by the individual is an integral part of the Company’s business and the extent to which the individual is economically dependent upon the Company’s compensation. Let’s reiterate – economic dependence of an individual on a Company was an issue in the past and one which we took into consideration when advising clients about whether an individual was really independent contractor or employee. It’s receiving greater weight now.
What should you do?
- Make a list of everyone you’re compensating for services performed (every person in your Vendor list), including the cleaning staff, maintenance, plumbing, IT.
- Make a list of everyone to whom you’re giving a 1099.
- Cross off the obvious Independent’s, i.e. AT&T, payroll companies that you absolutely know have a number of clients and for whom your payments to them are a drop in the bucket.
- What’s left is a list of your possible IC/Employee issues.
Now you have a few options:
- If you have plenty of time on your hands, you can read the following two documents:
- You can take 15 minutes to call Bob or me to briefly discuss your remaining vendors to get our input on whether you have a critical issue to be dealt with.
- You can take that list to a symposium/training we’re holding; Subcontractors, Exempt Employees and Internal DOL Audits. (sign up sheet).