The U.S. Department of Labor (DOL) has proposed significant changes in overtime rules that it expects will impact 3.6 million salaried workers, many of whom are employed by small businesses. You need to understand the proposed changes and then review your current compensation arrangements so you can decide how to proceed when a final DOL rule is adopted.
What the new rules say
Under the Fair Labor Standards Act (FLSA) overtime rule, you must pay time-and-a-half for overtime hours—more than 40 hours in a weekly pay period—to workers unless they are “exempt employees.” Under thresholds adopted in 2019 and in effect today, exempt employees are executive, administrative, and professional employees who perform certain duties and have salaries over a threshold amount–$684/week ($35,568 annually). The overtime rule also exempts highly compensated employees, defined as those with a salary over $107,432.
The proposed changes in the overtime rule would increase the salary thresholds to $1,059/week ($55,068 annually) for executive, administrative, and professional employees and to $145,988 for highly compensated employees. This means that if you have an executive who doesn’t meet the proposed wage threshold increase, the executive is not exempt and you’d have to pay overtime for hours exceeding 40 in the week.
The proposed changes would also mean an automatic adjustment in the thresholds every 3 years. This increase would not be based on cost-of-living adjustments but rather on current earnings data.
Direct and indirect impact on payroll costs
Employees who are currently exempt but would become non-exempt—and subject to the overtime pay rule—will increase your payroll costs if they work more than 40 hours in a weekly pay period. What you can do:
- Look over your current staff hours to project what increases you could expect. For example, if you have an employee who is no longer exempt and, from time to time, puts in an additional 5 hours or more a week, figure what this time-and-a-half will cost you so you can budget for it.
- Increase the salaries of currently exempt employees to maintain their exempt status. Consider the ripple effect this can have on your non-exempt employees and whether their wages need to be adjusted as well.
Obviously, any increase in what you pay your employees is a direct cost. But there may also be an indirect cost for an increase. Besides additional employment taxes (explained next), if your company has a qualified retirement plan that bases employer contributions on employee compensation, the added overtime cost will increase the cost of contributions.
Impact on employment taxes
Any increase in compensation means additional FICA taxes for an employer—6.2% for wages up to the annual Social Security wage base ($160,200 in 2023), plus 1.45% for all wages. If you increase employees’ wages to keep them exempt employees or highly compensated, your employment taxes go up. If you don’t but they put in overtime, your employment taxes go up. Bottom line: The proposed increase in the thresholds likely will trigger additional employment taxes for you.
Conclusion
The proposed increase in the thresholds could be changed in a final rule that’s yet to be issued. A comment period for the proposed change runs through November 7, 2023.
Submit comments if you want and monitor the release of a final rule so you can adjust your budget and your business practices (e.g., the need to raise your prices to account for your increased payroll expenses).
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