New DOL Overtime Rule Changes: 8 Key Questions

As of May 18, 2016, the US Department of Labor released its final rule regarding the changes to the overtime threshold for the Fair Labor Standards Act. Among other things, the Labor Department has doubled the minimum salary needed to qualify for these exemptions, from the previous level of $455/week ($23,660 annually) to $913/week ($47,476 annually), with increases every three years thereafter. This article, originally published on April 13, has been updated to reflect the final ruling.

This article was written by Jason Bramwell, Staff Writer at AccountingWEB, in sassociation with Paycor.

After months of speculation, on May 18, the US Department of Labor released its much-anticipated final rule that raises the white collar overtime exemption threshold under the Fair Labor Standards Act (FLSA). The new regulations take effect on Dec. 1, 2016.

The revised overtime pay regulations, which are estimated to affect at least 4.2 million American workers, will increase the salary threshold for the overtime exemption from $455 a week ($23,600 annually) to $913 a week ($47,476 annually).

As a result of this regulation, businesses will need to start tracking hours for exempt salaried employees who are at or below the $47,476 threshold, said Stacey Browning, executive vice president and chief strategy officer for Paycor, a provider of HR and payroll software.

“Many employers do not currently track the number of hours their salaried employees work. If you do not track these employees’ hours, you should begin doing so immediately,” she said.

AccountingWEB asked Browning eight questions regarding the final regulations, touching on topics such as the reasoning behind the changes, pros and cons, and the important role CPAs will play in helping their small business clients comply with the new rules.

AW: What is the reasoning behind the Department of Labor revising its overtime regulations?

Stacey Browning: The changes can be attributed in part to the fact that a growing number of employees are working more hours and not being compensated for them. At the heart of the final rule is the Department of Labor’s attempt to comply with President Obama’s goal of ensuring workers receive “a fair day’s pay for a fair day’s work.” The memorandum signed by President Obama on March 13, 2014, instructed the Department of Labor to look for ways to modernize and simplify FLSA regulations while ensuring that the FLSA’s intended overtime protections are fully implemented.

The final rule isn’t necessarily about collecting more fines on businesses. On one hand, increasing the exemption salary level is broadly beneficial and seems to make good common sense. The initial white collar exemption level was set in 1975 and hasn’t been changed since. Forty years’ worth of inflation has put a $23,600 per-year salary below the poverty line in today’s society, whereas in 1975, it placed someone in the upper 38 percent of workers. The poverty line for a family of four was $24,008 in 2015.

Also falling under the “common sense” approach, one of the stipulations of the Department of Labor’s threshold increase is for the white collar exemption salary to be tethered to the poverty line, which will more easily facilitate future increases or alterations.

AW: What are some pros and cons of the new regulations?

Browning: More than just updating the overtime threshold for modern standards, the Department of Labor’s final rule could benefit women and minorities in the workplace. The gender wage gap puts a lot of women in middle management firmly in the zone that would be covered by the salary exemption increase. On average in 2014, female managers earned $981 per week, compared to the $1,346 weekly salary earned by men.

The rule also addresses the gap in median income experienced by black and Hispanic Americans. In 2013, white Americans reported a median income of $55,257 annually, significantly more than the $40,963 average for Hispanic Americans and the $34,598 median for black Americans.

Another pro is that the regulations could promote better company behavior. The changes could serve as a detriment to some larger companies that may be cutting corners when it comes to paying employees for overtime.

As far as cons, one is that rural businesses may suffer. Smaller companies based in rural areas could be uniquely affected by new laws, as salaries in the $30,000 to $49,000 range can represent a comfortable income in small-town America. Having to pay overtime in those areas of the country can potentially cripple a business’ ability to operate and grow.

Another fear applies to businesses of any size: an uptick in the already-increasing trend of lawsuits being filed over wages and hours. As these types of litigation often involve recently terminated employees and their former employers, more concerns abound for small to midsized businesses. Those that may choose to trim their workforce in order to help the bottom line and meet FLSA compliance regarding the new overtime rules could lose any financial savings to court costs and representation.

AW: Do you think small businesses will be impacted most by the changes?

Browning: Small businesses with a high number of hourly and seasonal employees, nonprofits, and retail, restaurant, and manufacturing industries will be most affected.

Overtime can be costly for small businesses with fewer employees and locations, especially when there may be just a few vital managers or workers whose occasionally heavy workweeks are both expected and necessary. This could either lead to tighter budgets for those businesses or unexpected layoffs of valuable employees no longer over the exemption threshold.

AW: Should small business owners be implementing new processes and systems now so they are in compliance when the new regulations take effect on Dec. 1?

Browning: Those who may be affected by the new regulations are salaried exempt employees making $47,476 per year or less. Small business owners should have a plan in place for each of these employees, as they may become eligible for overtime pay. Depending on their current salary, their role, the classification of their role, and the number of hours they work, each employee will have a different outcome. You should start by creating a list of every exempt employee and their compensation to make the best decisions for your organization.

Having an accurate calculation of hours worked per week will be very important as you seek to comply with these new regulations. Employers will need to have a time and attendance tracking solution that helps them accurately manage their employees’ hours through a unified system with payroll. Enabling employers to run real-time reports on hours worked and employees’ rate of pay will be a critical advantage.

Download Paycor’s 7 Step Guide to Mastering the Final Department of Labor Overtime Regulations for more tips on how to prepare for the new changes.

AW: What can a small business do to avoid becoming a target of an employee lawsuit or a Department of Labor audit under the new regulations?

Browning: It’s critical that employers have accurate hourly data and a clear audit trail for the hours their employees have worked for a few reasons.

• Accuracy: As a result of the new regulations, employers will have to pay their salaried employees who are below the new threshold for any overtime hours worked.
• Audit trail: If an employee reports your organization for not following the new regulations, the Department of Labor will audit your business.
• Decision support: As you consider how you will handle each employee’s labor situation, you will need to have accurate employee time data. The amount of hours they currently work directly impacts how you choose to handle their compensation.

AW: What kind of conversations should small business owners have with their employees regarding the changes?

Browning: Employers should communicate the changes to employees now to prepare them for the potential impact. Small business owners need to be transparent about the current state of the regulations – it’s public knowledge. Let employees who could be impacted know there is a chance they may be reclassified to nonexempt.

Train managers prior to the communications so they can be prepared to answer employee questions, and have employees assist in tracking their own hours, as some employees may have to work from home after-hours and on the weekends.

Owners will need to begin developing broader communication plans within their organization to effectively communicate any changes.

Download Paycor’s Essential Employer Conversation Guide to help manage challenging conversations with affected employees.

AW: Do you believe the new regulations will have an impact on key business decisions, such as hiring, benefits, or flexible work opportunities?

Browning: Yes, because the changes will limit flexible schedules for affected employees. There are three main options for employers to consider:

• Raising salaries to the exemption threshold: If employers decide to raise salaries to the higher threshold, they will incur additional costs for each employee. For example, if you have an employee who makes $40,000 a year and you raise their annual salary to $47,476 – the final threshold – you will automatically add $7,476 per year to your operating costs for just one employee.
• Reclassify affected employees and do not limit overtime: If employers decide to not limit overtime, they will also incur additional costs for each employee. It will be crucial for employers to understand exactly how many hours their employees are working to make sure they set their new pay structure appropriately.
• Reclassify affected employees and prohibit overtime without authorization: This option will likely reduce the number of hours some employees work. This could be seen as a benefit, but it may also mean that affected employees cannot accomplish the same amount of work.

AW: How important of a role will a small business owner’s CPA play in the compliance process? What key issues will a CPA be able to advise the business owner on?

Browning: Many small business owners rely solely on their accountants as their most trusted advisor for compliance, and this reliance will continue to increase as regulation changes increase in the future. In addition, compliance through technology becomes more effective when a business owner has the aid of a strong advisor, or team of advisors, to interpret the specific regulations that impact the owner’s business.

Depending on the client’s needs, an accountant should provide a customized compliance approach. This can range from simple quarterly business reviews, to macro-level advice on general compliance risk areas, to a strategic approach where the CPA takes the lead to establish a compliance team with the client’s other advisors, such as a retirement broker, health and benefit broker, and legal counsel.

Some of the key compliance issues that accountants can help a business owner with include:

• Determining business structure: Each business has a number of options – limited liability company, C corporation, S corporation, or sole proprietorship.
• Establishing accounting principles: Although GAAP is the standard for public companies, some small businesses have begun using the Financial Reporting Framework for Small- and Medium-Sized Entities.
• Taxes: Tax laws change constantly, and accountants are often expected to be the experts in federal, state, and local laws, as well as international in some cases.
• Employee classification: Full-time, part-time, and 1099 contract employees are all defined differently. Each may impact the business and benefit requirements in different ways.
• Payroll regulations: The Department of Labor overtime rule changes and the Affordable Care Act employer mandates are greatly impacting payroll regulations for businesses.
• Audit services: This service can range from simply providing reports in the case of an audit, to defending an audit, to conducting an independent audit to prove compliance.

This list is not comprehensive. Regulations will continue to evolve and change. Accountants will constantly be relied on as the most trusted advisor as long as they continue to lead with proactive advice for their clients.

For more tips on how to prepare for DOL overtime changes, download the free Paycor guide, 7 Step Guide to Mastering the Final Department of Labor Overtime Regulations.

Are You Behind on Payroll Taxes? Beware of the Consequences: How the IRS Addresses Unpaid Payroll Taxes

Many small business owners may be in distress over unpaid taxes. They are looking for information, guidance, and hope. The full breadth and range of tax problems keeping people awake at night is practically endless, but there is one issue that I see again and again: unpaid payroll taxes. This is one of the most common reasons that businesses (of any size) are in trouble with the IRS, and unfortunately, it is one of the most serious.

The IRS pursues this type of liability much earlier and much more aggressively than cases of unpaid personal income tax (or unpaid business income tax), and the consequences can be swift and severe. Unpaid payroll taxes can affect more than just the business owner(s) - it can hit just about everyone in the business that has check signing authority - the owner(s), partners, managers, supervisors, and even payroll clerks

Why Do Businesses Get Into Payroll Tax Trouble?

Payroll taxes, also known as employment taxes, are made up of three parts:

• The federal income tax that employers are required to withhold from employees' paychecks;
• The federal Social Security and Medicare taxes that employers are required to withhold from employees' paychecks; and
• The matching part of federal Social Security and Medicare taxes that employers are required to contribute.

These payroll taxes are called trust fund taxes by the IRS because the funds are held in trust, and that is the reason the IRS takes such a strong stand against nonpayment here. The IRS regards falling behind on filing and submitting payroll taxes as a type of theft, as the funds never belonged to the business in the first place.

For the average small business owner with cash-flow issues, making regular payments to the IRS can feel like a burden. When they are struggling to make ends meet during a downturn, it can be incredibly tempting to pay the rent or settle accounts with demanding creditors before paying the IRS. Filing late feels like a temporary loan to bridge a gap, and seems harmless, but the results are anything but.

Note: The IRS takes failure to pay payroll taxes, especially with respect to active businesses, very seriously and often assigns field agents to stop businesses that accrue payroll tax liability over more than two quarters.

Investigation and Consequences

The IRS considers unpaid payroll taxes a very serious violation. The agency will send out reminder notices once a business has missed a payment or two, but it may not wait long before it sends a revenue officer out to the business in person, unannounced. This is when the business owner will probably be given Form 9297, Summary of Taxpayer Contact, and Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. Things can start to snowball pretty quickly after that.

The following are three actions the IRS could take:

Trust fund penalty assessments. The IRS will not only be attempting to collect the unpaid funds, but it is also likely to be launching an investigation against the business and the people associated with that business: the trust fund penalty investigation.

Like all unpaid taxes, payroll taxes begin to collect penalties and interest, but the trust fund penalty is a special case. It is equal to the amount of the unpaid tax, and crucially, it can be assessed not only against the company, but against anyone who the IRS determines is a “responsible person.” This can be anyone who has ever signed a paycheck or who could be considered to have knowledge of the workings of the business and willfully decided to withhold payment. It could be the business owner or even an involved accountant or CPA.

The trust fund penalty investigation is a harrowing experience: The IRS issues an administrative summons to the bank accounts and copies of the business’ bank signature cards and copies of its canceled checks. The signers may become targets, even if they were not decision-makers, and the problem is that the IRS takes a “guilty until proven innocent” stance. It is up to the individual to prove that he or she should not be held liable.

Note: The IRS revenue officers will usually conduct in-person interviews between different members of the company. Often the revenue officer will try and get individuals to point the finger at different people, with the hopes of having multiple people to assess with a trust fund liability penalty. The IRS will then pursue those individuals and their individual assets, including bank accounts, liquid assets, and even the equity in their homes.

Collection tactics. The IRS has the legal right to collect the unpaid payroll tax in almost any way it sees fit. The agency is not likely to accept payment plans if it believes it can collect the balance in full, and it has the ability to shutter a business without a court order through levying the business’ operating account and to liquidate assets. The IRS can go after the personal assets and bank accounts of any individual deemed responsible, and payroll tax debt is not dischargeable in bankruptcy.

Criminal proceedings. Responsible individuals can also find themselves investigated for and charged with a federal felony, if the investigation uncovers suspected fraud.

As you can see, the IRS pulls no punches when pursuing unpaid payroll taxes. If you are a business owner, you owe it to yourself to stay on top of these taxes to keep the IRS at bay.

About the author:

Sam Brotman is a practicing attorney in San Diego and the founder of Brotman Law. His practice primarily centers on all aspects of tax...

NOTE: I took the liberty to make a few small changes to the text at the beginning of this article in order to make the article more relevant to my readers. Other than those few changes, the remainder of the article is unchanged from the original article as written by Sam Brotman and published on the accountingWEB website on June 10, 2016.