Advising on U.S. DOL’s Overtime Rule and Worker Classification Issues

I don’t know about you, but I’ve been having more conversations with my clients on employment issues lately. The new U.S. Department of Labor’s (DOL) overtime rule was announced May 18 and goes into effect December 1, 2016. Among other things, the new rule extends eligibility for overtime to certain white-collar workers by increasing the wage threshold from $455/week to $913/week ($47,476/year).

When my clients call with a “quick question” about the new rule, I chuckle to myself. These calls usually take an hour or more, as one question leads to another. These worker classification decisions can have major budget implications, particularly for small businesses and not-for-profits, and there is little time to come into compliance before December 1. In many small businesses without an HR department, employment issues fall under the finance or accounting function.

Here is the basic guidance I’ve given to clients:

Review job descriptions and personnel records.

Their first question is “what is this going to cost?” But before beginning to do any analysis, my advice to clients is to use this opportunity to blow some cobwebs off their organization’s hiring records and contracts to make sure all overtime-eligible individuals are identified.

The white-collar job duties test, though it remains unchanged, needs a closer look in light of the new rule. Just because the word “manager” is in an employee’s title does not determine anything. Take a case-by-case look at a worker’s responsibilities; for example, do they exercise a degree of independent judgment on matters of significance to the organization? Refer to the DOL’s fact sheets that describe criteria for bona fide executive, administrative, professional and outside sales employees. It is not always straightforward, and in those instances, I encourage my clients to seek the counsel of an attorney specializing in employment law.

Look at classification of contractors versus employees.

Improper classification of workers as independent contractors, when they really ought to be treated as employees, is a perennial problem. A common misperception: Just because a position is grant-funded does not necessarily mean the worker is an independent contractor. The primary issue is who “controls” the worker, as well as the type of relationship and the financial aspects. The IRS’s Publication 15-A has detailed information on making the determination.

Consider options available and budget implications.

Now that you have identified those employees that will need to be reclassified, the next question is “where do we go from here?” Well, one option is to pay the additional cost of overtime for those eligible employees who work more than 40 hours a week. On the other hand, some organizations forbid overtime, or are making plans to shift work schedules, hire additional part-time workers, or find volunteers to pick up the slack. Some organizations may reduce salaries so they do not result in overtime. Although the latter options keep costs contained, they can harm productivity and morale.

One challenge for organizations affected by seasonal fluctuations in workload (for example, charitable organizations during the busy holiday giving season), is that they may need to reassess their comp time practices. If an employee is reclassified, they must be paid overtime for any hour over 40 they work in a week; comp time cannot be substituted for overtime for nonexempt employees.

Additionally, organizations with positions that are funded by grants may be contractually obligated to maintain program services at a specific level in accordance with the grant terms. Yet, when increased staffing costs are not covered under the grant, absorbing those costs could leave the organization in dire straits.

A great tool for decision-making is a “what if” scenario analysis. Compare changes in the threshold to current employee salaries and wages. Considering the options, compute the costs and compare the effects on your budget and cash flow. Then consider the intangible costs on employee morale and work distribution.

For small businesses, there are difficult decisions ahead. For businesses with June 30 year-ends (common for not-for-profits) whose budget cycle has completed, they may need to amend their budget for the 2016/17 fiscal year. Additionally, they will need to update timekeeping and payroll systems, conduct training for managers, and talk to employees who have been reclassified.

Want to learn more on this topic? Join the AICPA Not-for-Profit Section’s upcoming webcast on August 24. The presentation will be geared toward charitable organizations and is open to anyone with an interest in employment compliance. There will be opportunities for Q&A. The event is CAE and CPE eligible.

Jeff Lange, JD, CPA, President, GHI Accounting. Jeff has spent over 25 years in the industry as an auditor, accountant and tax consultant. He is also a member of the Not-for-Profit and Tax Sections of the AICPA.

Man working overtime image courtesy of Shutterstock.

Advising on U.S. DOL’s Overtime Rule and Worker Classification Issues

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