New Overtime Rule Prompts Considerations On Compliance, Payroll Procedure Changes

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By Howard Perlman

Employers that respond to the new federal overtime rule by upgrading electronic systems and reviewing employee classifications before the rule takes effect Dec. 1 could avoid complications regarding year-end processing, payroll and compensation professionals told Bloomberg BNA.

The final rule ( RIN 1235-AA11) is to increase the standard salary threshold for the executive, administrative and professional exemptions from the Fair Labor Standards Act's overtime protections to $913 on a weekly basis, up from $455, and to $47,476 on an annual basis, up from $23,660. Also under the rule, nondiscretionary bonuses, incentive payments and commissions may be applied to up to 10 percent of the standard salary threshold if they are paid at least quarterly and the annual salary threshold for highly compensated employees is to increase to $134,004, up from $100,000.

About 4.2 million workers who now are exempt from FLSA overtime protections would become nonexempt when the final rule is implemented Dec. 1 if their salaries do not change, the Labor Department said in a fact sheet regarding the rule. Payroll departments should begin preparations for compliance with the rule months in advance of Dec. 1 to limit interference between normal year-end processing and adjustments to accord with the rule, Bill Dunn, CPP, director of government relations at the American Payroll Association, told Bloomberg BNA on May 27.

“Before Dec. 1, you would hope companies are gearing up, looking at numbers, figuring out who will need to be reclassified from exempt to nonexempt so that in the midst of year-end, they don’t have the issue of the rule going into effect and taking resources away from other year-end tasks. That would be a significant burden on year-end,” Dunn said.

Testing payroll systems before Dec. 1 to ensure they would be able to accommodate pay adjustments in response to the final rule would be preferable to waiting until Dec. 1 to make changes and discovering technical difficulties preventing proper payment for newly nonexempt employees, Martin Armstrong, CPP, vice president for payroll shared services at Charter Communications Inc., told Bloomberg BNA on May 27.

“Don’t leave this to chance,” said Armstrong, a member of Bloomberg BNA's Payroll Library Advisory Board. “Payroll practitioners don’t like surprises. Start doing some user-acceptance testing. See how many people can be processed successfully and see if with the expected additional nonexempt personnel you need a bigger server or the system is running slowly.”

Applying Bonuses to Threshold

Employers likely would not use the new rule's option to apply nondiscretionary bonuses and incentive payments toward 10 percent of the standard overtime salary threshold because most employers do not offer such payments quarterly and likely would not after Dec. 1, said Kerry Chou, senior practice leader at WorldatWork.

Many companies that offer annual nondiscretionary bonuses or incentive payments would be reluctant to shift to a quarterly model for such payments because they view employee performance over a year as a better indicator of value than performance over a quarter, especially because an employee with strong performance on average over a year might not have strong performance in all quarters of the year, Chou told Bloomberg BNA on May 27.

“For mid-to-large employers, especially publicly traded companies where boards of directors approve incentive plans, the quarterly system is very problematic,” Chou said. “If a company knows it has cycles of business activity through the year, you can look at the work from an annual perspective that includes highs and lows, and you would be hamstrung by a quarterly analysis.”

An industry that could be especially prominent with regard to using the 10 percent crediting option for the standard salary threshold is the retail industry, as nondiscretionary commissions can be credited to the threshold and it is quite common for retail employees to be eligible for commissions on at least a quarterly basis, Brent Gow, CPP, global payroll director at Starbucks Coffee Co., told Bloomberg BNA on May 25.

The new overtime rule allows employers to credit nondiscretionary bonuses paid in the pay period after the end of a quarter toward payments made during the quarter for achieving the standard salary threshold, so employers seeking to credit a bonus paid during the first pay period of a year toward the fourth quarter of the previous year would experience a new year-end issue, Dunn said. Such employers also would have a tax consideration as to whether it would be more logical to pay a bonus associated with the fourth quarter in the first pay period of the next year or the fourth quarter itself, he said.

As the payroll departments of some companies are not informed of bonus amounts until shortly before bonus payments are to be made, it will be important for payroll personnel in these companies to enhance cross-departmental communication regarding bonuses so they can bolster compliance with the new rule, Dunn said.

Time Sheet Management

Payroll departments that properly communicate to employees who are to become nonexempt under the final overtime rule any new payroll procedures they must follow starting Dec. 1 will increase the likelihood of success in complying with the new rule, said Gow, who is the chairman of the Payroll Library Advisory Board.

Payroll personnel should ensure that before Dec. 1, employees who currently are exempt from the FLSA's overtime protections but who are to become nonexempt Dec. 1 have sufficient training with regard to recording overtime hours in their company's payroll system, Armstrong said.

However, “there are plenty of companies that don’t keep time sheets for salaried employees currently considered exempt, but they’ll have to start doing that for employees affected by the rule change,” Dunn said.

Auditing the time sheets of employees who recently became nonexempt is to be crucial, especially with regard to avoiding off-cycle payments of overtime premiums for overtime hours that were not originally reported, Gow said.

To avoid unexpected overtime costs, “employers are going to have to be very diligent about telling newly nonexempt employees when they can’t work,” Chou said.

Examining Electronic Systems

Computing payroll for employees who become nonexempt from FLSA overtime protections Dec. 1 is a task that some employers' electronic payroll systems would be unable to sufficiently perform without adjustment to hardware or licenses, Armstrong said. Payroll departments therefore should review these factors and make necessary adjustments before Dec. 1, he said.

“Payroll professionals are going to need to ensure that their current time and attendance systems have the ability to take on more people,” Armstrong said. “We need to make sure the systems can handle an increased workload.”

Employers' licenses for using electronic time and attendance programs might need to be updated in advance of Dec. 1 because some payroll software developers do not require salaried employees to be covered by such licenses but require coverage for hourly employees, Armstrong said. Employers might reclassify some currently exempt salaried employees as nonexempt hourly employees in response to the new overtime rule.

Using an electronic time and attendance system to track a higher number of hourly employees Dec. 1 than were tracked before the new overtime rule takes effect could cause the license fee for that system to increase, Armstrong said.

The new rule's provision that the overtime salary thresholds are to be adjusted every three years starting Jan. 1, 2020, allows employers to “be in a better position to not have to make drastic changes” to classifications of employees as nonexempt or exempt than if more frequent adjustments were required, Gow said.

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