Department of Labor Overtime Rule
On May 18th, 2016, the Department of Labor (DOL) announced its final rule related to overtime pay. Under the new rule, the standard salary threshold will double from $455 per week to $913 per week. This amounts to a change in an annual salary from $23,660 to an annual salary of $47,476. Further, the threshold exemption for Highly Compensated Employees (HCE), will increase from $100,000 to $134,004. These changes take effect December 1, 2016, and will automatically update every three years. This rule will cause significant burden to firms and businesses, and will have a disproportionately negative affect on small businesses.
Under the Fair Labor Standards Act (FLSA), employees must be paid overtime for any hours worked over a 40 hour work week. The FLSA contains exemptions from overtime pay for employees in executive, administrative, professional, outside sales and certain computer-related jobs. This is considered the executive, professional or administrative (EAP) exemption. To be considered exempt from overtime under the EAP exemption, employees must meet three tests.
- The employee must be paid on a salary basis (the salary basis test)
- The employee must be paid more than $455/week which amounts to approximately $23,660 annually (the salary threshold test)
- The employee must perform primary duties consistent with executive, professional or administrative positions (the duties test)
A second salary threshold exists for Highly Compensated Employees (HCE) who perform office or non-manual work. Provided these employees “customarily and regularly performs at least one of the exempt duties or responsibilities of an EAP” these employees are exempt from overtime as well.
On May 18, 2016, the Department of Labor (DOL) released their final rule on overtime titled Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. The final rule will increase the standard salary threshold to $913 per week or approximately $47,476 per year. In making this change, DOL is tagging the standard salary threshold to the 40th percentile of workers for the lowest-wage census region in the nation, currently the South. This threshold will automatically update on January 1 every three years beginning in 2020. The rule also sets the highly compensated employee (HCE) exemption at $134,004 up from $100,000. This represents the 90th percentile of full-time workers nationally and will also automatically update every three years starting on January 1, 2020.
Finally, the final rule does not take into account certain nuances of the profession, for example, the spike in tax preparation work performed seasonally. Under the FLSA, only public agencies (states, a political subdivision of a state, or an interstate government agency, and some public universities that qualify as “public agencies”) may utilize compensatory, or “comp,” time to cover overtime pay obligations. According to DOL, “Private employers cannot satisfy their overtime obligations by providing comp time and must pay overtime-eligible employees an overtime premium for hours over 40 in a workweek.”
Importance to CPAs
The increased thresholds for the overtime exemption under the FLSA radically expands the number of employees eligible for overtime pay. These changes will have a particularly significant negative impact on smaller accounting firms and on firms in certain geographic regions, like rural areas, where income rates tend to be lower. Ultimately, the rule impacts major business decisions like hiring, expansion, offering new benefits, or the ability to offer more flexible work arrangements for employees, such as offering flex hours and comp time. It may even require reductions at firms and companies. In addition to absorbing payroll burdens, because DOL’s rule does not take into account the seasonal nature of the accounting profession, in order to meet the demands of tax season each year, yet continue to comply with the rule, many firms will be forced to reduce flexible options for their staff.
The profession remains concerned that the rule on overtime will increase the administrative burden in complying with the regulations while dramatically increasing employers’ payroll costs. We urge Congress to engage to halt the rule and encourage DOL to conduct a robust economic impact assessment before issuing a new rule. The AICPA supports H.R. 4773 and S. 2707 and encourages Members of Congress to cosponsor these bills.
- On September 3, 2015, the AICPA sent a comment letter to DOL regarding their proposed rule on overtime. The AICPA expressed appreciation for the DOL’s efforts to ensure the regulations governing overtime pay reflect the evolving workplace and economy, but voiced concern regarding the administrative and payroll impact of the rule on the profession. The AICPA letter was one of over 270,000 comments submitted regarding the proposed rule.
- On September 4, 2015, the AICPA, joined the Partnership to Protect Workplace Opportunity (PPWO) – a business community coalition, championed by many associations and organizations representing a diverse set of businesses industries – in signing the coalition’s comment letter. The PPWO’s letter was consistent with the points the AICPA had made and was signed by 133 business-community organizations.
- On December 7, 2015, the AICPA joined another PPWO initiative by signing a letter to Members of Congress asking that they urge DOL to reconsider the proposed overtime rule.
- On April 18, 2016, the AICPA joined two letters along with the PPWO which were sent to Members of Congress. The letters, one sent to U.S. Senators and the other sent to members of the U.S. House of Representatives, urged cosponsorship of legislation introduced to halt the proposed overtime rule until DOL conducts a robust economic impact study on the effects of the rule.
- On April 22, 2016, the AICPA participated in a stakeholder meeting arranged by the PPWO, attended by approximately 20 PPWO members at the Office of Management and Budget (OMB) during OMB’s review of the final rule. AICPA staff attended the meeting along with a member of the Kentucky Society of CPAs.
- On April 27, 2016, the AICPA met with OMB to discuss issues of concern to the profession regarding the proposed overtime rule. The meeting was attended by AICPA staff and representatives of the Maryland Association of CPAs. Attendees’ comments covered concerns regarding the geographic disparities of the rule, the impact on employees and flexibility in the workplace, actions employers at both firms and state societies will need to take to absorb costs and comply with the rule, concerns regarding comp time and other factors related to work with seasonal objectives, concerns with potential changes to the duties test, and what we are hearing from our members.
Legislative or Regulatory Action
Legislation was introduced in both the House and the Senate on March 17, 2016, which would require the Secretary of Labor to nullify the Department of Labor’s proposed overtime rule and conduct a robust economic analysis before proposing a new rule on overtime. The Protecting Workplace Advancement and Opportunity Act, H.R. 4773 introduced by Representative Tim Walberg (R-MI) and House Education and Workforce Committee Chairman, John Kline (R-MN) and S. 2707, introduced by Senators Tim Scott (R-SC) and Lamar Alexander (R-TN), are currently working through the legislative process.
- AICPA Comment Letter to the Department of Labor, September 3, 2015
- Partnership to Protect Workplace Opportunity’s Comment Letter, September 4, 2015
- Partnership to Protect Workplace Opportunity Letter to Members of Congress December 7, 2015
- Letter to the House in support of the bill H.R. 4773, the Protecting Workplace Advancement and Opportunity Act, April 18, 2016
- Letter to the Senate in support of the bill S. 2707, the Protecting Workplace Advancement and Opportunity Act, April 18, 2016