How the new overtime rule will affect the construction industry

by David M. Wolfenden, CPA, CVA, MS, Managing Director

This past May, the Department of Labor (DOL) released a final rule that dramatically alters how employers across the country will approach overtime pay. And the construction industry stands to be heavily affected by the changes.

Like many contractors, you may have project managers, estimators and other salaried employees who are currently exempt from receiving overtime pay. Well, under the new rule, this may no longer be the case. Let’s look at some of the critical points to keep in mind going forward.

Three key tests
As you’re no doubt aware, under the Fair Labor Standards Act, certain executive, administrative and professional employees are exempt from overtime pay requirements. To qualify for the exemption, an employee generally must satisfy three tests related to:

  1. Salary basis. The employee must be salaried, meaning he or she is paid a predetermined and fixed salary that’s not subject to reduction because of variations in the quality or quantity of work performed.
  2. Salary level. Until the final rule takes effect, the employee must be paid at least $455 per week or $23,660 annually. See below for more information.
  3. Duties. The employee must primarily perform executive, administrative or professional duties.

Neither job title nor salary alone can justify an exemption — the employee’s specific job duties and earnings must also meet applicable requirements.

Increased thresholds
First and foremost, the revised final rule increases the salary level threshold for exempt employees to $913 per week or $47,476 per year. It also allows up to 10% of the salary threshold for those not considered highly compensated employees (HCEs) to be met by non-discretionary bonuses, incentive pay and commissions. But such payments must be made at least quarterly.

So, say you pay a project manager a salary that’s under the threshold, but he also receives certain production or performance bonuses based on job phases or goals. Because of these incentives, he may end up exceeding the threshold and remain exempt from overtime requirements (assuming other tests are satisfied).

In addition, the final rule raises the definition of HCEs for purposes of automatic exempt status from those earning $100,000 in annual income to those earning $134,004. These amounts will be automatically adjusted for inflation at three-year intervals, beginning in 2020.

HCEs must still receive at least the full standard salary amount — or $913 — per week on a salary or fee basis without regard to the payment of non-discretionary bonuses and incentive payments. Such payments will, however, count toward the total annual compensation requirement.

The revised amounts for both non-HCEs and HCEs are scheduled to take effect December 1, 2016. Annual compensation levels will then automatically be updated every three years to maintain prescribed percentiles, beginning January 1, 2020. The DOL will post new salary levels 150 days before their effective dates.

Effects and ideas
The major impact of the rule is that you’ll likely find it harder to exempt employees from overtime requirements. What’s more, your payroll tax liability may increase if you have to pay overtime to more employees or pay higher salaries to keep workers exempt.

Start projecting your compliance challenges now. You may not need to do anything if your currently exempt employees fall short of the new salary level and don’t exceed 40 work hours per week. If they do, as mentioned, you could raise the salaries of those who:

  • Meet the duties test,
  • Earn salaries near the new salary level, and
  • Regularly work overtime.

Paying them at or above the salary threshold will maintain their exempt status.

Beyond that, you could establish various salary arrangements that account for overtime in a projectable and manageable way. For instance, you might establish a salary arrangement that pays a stated amount for the first 40 hours of work per week and then an overtime amount for any hours over 40.

Or you could pay a straight-time salary for more than 40 hours in a week for employees who regularly work more than 40 hours, and pay overtime in addition to the salary. In this case, you’d be required to pay an additional half-time overtime premium for overtime hours already included within the salary, plus time and a half for hours beyond those included.

We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.

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