By: Lee Frank, MBA, CPA
On Sept. 24, 2019, the Department of Labor (DOL) issued the final rule on overtime pay, providing guidelines to employers across the country on who should and should not be eligible for overtime pay. This ruling sets new earning thresholds for salaried employees in professional positions within an organization, making 1.3 million more workers eligible for overtime pay after working beyond 40 hours in a work week. With the changes going into effect on Jan. 1, 2020, many employers are scrambling to make sure their salary and overtime pay policies are in line with the updated regulations, as failure to do so could be costly.
A company must apply a three part test in determining whether an employee is exempt from overtime pay. All three parts of the test must be met for an employee to be considered exempt.
- The employee must be paid a salary.
- The employee must be paid a salary of at least $35,568 per year ($684/week). However, the fact that an employee is salaried does not automatically make them an exempt employee.
- The employee must perform exempt job duties. See this DOL fact sheet for a comprehensive overview. Examples that might apply to postsecondary institutions include:
- Executive (supervisory and Human Resource functions)
- Professional (learned professions, including teachers and professors)
- Administrative (office/non-manual work, apply independent judgement)
- Computer Employee (systems analyst, programmer, software engineer)
If the employee fails any part of this test, then, they fail to meet the exception requirement and are considered nonexempt and are overtime eligible. There are however, industry specific exceptions to the general rule.
Higher Education Industry Specifics
Higher education also has several carve-outs that limit the impact of the overtime rule. Below is a summary of those positions that may be considered exempt depending on their specific roles, even if they do not meet the new wage threshold.
- Graduate and Undergraduate Assistants
- Academic administrative personnel (only required to be paid entry-level teacher salary)
Once the determinations have been made as to whether a position is or is not exempt for overtime pay, the company or institution must act to ensure they are in compliance before the beginning of 2020. Failure to do so could leave the company in a noncompliance status with the DOL and leave itself open to fines, penalties and back pay liabilities
What to Do
It is now the duty of the employers to interpret and apply the rule across their employee base and to document the decision made in regard to each job description. There are no formal documentation requirements, but upon DOL inquiry, it is the responsibility of the employer to provide rationale for their exempt or nonexempt determination.
It is imperative that employers comply with the rule. The potential hardships caused by the underpayment of compensation — namely, penalties, interest and back pay liabilities — can quickly become a significant burden to employers. Additionally, not correctly identifying exempt employees could lead to the potential overpayment of salaries and overtime wages.
While many industries will find it easy to apply, the education industry in particular may find the final rule a bit more cumbersome. McClintock & Associates is now available and able to assist our clients with any questions regarding the application of this significant change to overtime requirements. Please reach out to our Tax Department directly for assistance.