by H2R CPA Team
The Trump administration has released its long-awaited proposed rule to update the overtime exemptions for so-called white-collar workers under the Fair Labor Standards Act. The rule increases the minimum weekly standard salary level for both regular workers and highly compensated employees (HCEs). It also increases the total annual compensation requirement for HCEs that’s required to qualify them as exempt. In addition, it retains the often confusing “duties test.”
The Trump administration rule generally is more favorable to employers than the Obama administration’s 2016 rule, which a federal district court judge in Texas halted before it could take effect. While the latter was expected to make 4.1 million salaried workers newly eligible for overtime (absent some intervening action by their employers), the U.S. Department of Labor (DOL) predicts that the newly proposed rule will make 1.3 million currently exempt employees nonexempt. The DOL estimates the direct costs for employers under the proposed rule will ring in at $224 million less per year than under the 2016 rule. (It’s unclear whether these figures take into account payroll tax obligations.)
The current rule
The regulations regarding the overtime exemptions for executive, administrative and professional employees haven’t been updated since 2004. Under them, an employer generally can’t classify a white-collar employee as exempt from overtime requirements unless the employee satisfies three tests:
Neither job title nor salary alone can justify an exemption; the employee’s specific job duties and earnings must also meet applicable requirements.
Certain employees (for example, doctors, teachers and lawyers) aren’t subject to either the salary basis or salary level tests. The current rules also provide an easier-to-satisfy duties test for certain HCEs who are paid total annual compensation of at least $100,000 (including commissions, non-discretionary bonuses and other non-discretionary compensation) and at least $455 salary per week.
The Obama administration’s proposed rule
The 2016 rule focused primarily on the salary level test, increasing the threshold for exempt employees to $913 per week, or $47,476 per year. The levels would have automatically updated every three years beginning January 1, 2020. At the time, President Obama argued that the overtime regulations had “not kept up with our modern economy.”
By more than doubling the salary level test, the rule would have made it unnecessary for employers to even consider an employee’s duties in many cases. If the employee’s pay fell under the threshold for exemption, the duties would be irrelevant — the employee already couldn’t be exempt.
The Obama rule also would have raised the HCE threshold above which the looser duties test applies. It boosted the level to the 90th percentile of full-time salaried workers nationally, or $134,004 per year. The rule would have continued the requirement that HCEs 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. However, such payments would have counted toward the total annual compensation requirement.
The Obama rule was scheduled to take effect on December 1, 2016. On November 22, 2016, however, a district court judge granted a preliminary injunction stopping the implementation. The Fifth Circuit Court of Appeals subsequently declined to review the case until the DOL issued revisions.
The latest proposed rule
The DOL’s newly proposed rule would raise the standard salary level threshold to $679 per week, or $35,308 per year. For employees whose salary exceeds this level, overtime eligibility will depend on whether they primarily perform executive, administrative or professional duties. That determination would continue to turn on various checklists of criteria, many of which can seem outdated and not reflective of today’s workplace. Moreover, they’ve long invited litigation by employees challenging their employers’ application of the criteria.
The proposed rule raises the total annual compensation requirement for HCEs to $147,414, and HCEs also must make at least $679 per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. But it would allow employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. This means an employee’s production or performance bonuses could push him or her over the threshold and into exempt status (assuming the salary basis and looser duties tests are satisfied).
A catch-up payment is allowed for employees who don’t earn enough in non-discretionary bonus or incentive payments in a given 52-week period to meet the HCE salary threshold and retain his or her exempt status. Within one pay period of the end of the 52-week period, the employer can make a payment of up to 10% of the total standard salary level for the preceding 52-week period. This payment will count toward only the previous year’s salary amount — it doesn’t count toward the salary amount in the year it’s paid.
The duties test isn’t the only part of the existing rules that wouldn’t change under the proposed rule. No changes are made to the overtime protections for certain categories of employees, including police officers; firefighters; paramedics; nurses; and specified non-management employees, such as production-line employees and maintenance and construction workers.
The proposed rule also leaves out the automatic adjustments to the salary thresholds that were included in the Obama rule. The DOL acknowledges, though, that such thresholds can become “substantially less effective over time.” It proposes updates every four years and solicits public comment on how best to implement these future updates.
Not a sure thing
The DOL has solicited public comments on the proposed rule and indicated it expects the finalized rule to take effect on January 1, 2020. Legal challenges are likely from both business and worker groups, though. Some have questioned whether the DOL even has the authority to base overtime eligibility on salary levels. Stay tuned for more developments.
Contact H2R CPA at 412-391-2920 or firstname.lastname@example.org with any questions.
by H2R CPA Team
There’s an old saying regarding family-owned businesses: “Shirtsleeves to shirtsleeves in three generations.” It means the first-generation owner started in shirtsleeves and built the company up from nothing but, by the third generation, the would-be owner is back in shirtsleeves with nothing because the business failed or was sold.
Although you can’t guarantee your company will buck this trend, you can take extra care when choosing a successor to give your family business a fighting chance. Here are seven steps to consider:
1. Make no assumptions. Many business owners assume their son or daughter wants to run the company or that a particular child is right for the role. But such an assumption can doom the company.
2. Decide which family members are viable candidates, if any. External parties such as professional advisors or an advisory board can provide invaluable input. Outsiders are more likely to be impartial and have no vested interest in your decision. They might help you realize that someone who’s not in your family is the best choice.
3. Look at skills and temperament. Once you’ve settled on a few candidates, hold private meetings with each to discuss the leadership role. Get a feel for whether anyone you’re considering may lack the skills or temperament to run the business.
4. If there are multiple candidates, give each a fair shot. This is no different from what happens in publicly held companies and larger private businesses. Allow each qualified candidate to fill a position at the company and move up the management ladder.
5. Rotate the jobs each candidate performs, if possible. Let them gain experience in many areas of the business, gradually increasing their responsibilities and setting more rigorous goals. You’ll not only groom a better leader, but also potentially create a deeper management team.
6. Clearly communicate your decision. After a reasonable period of time, pick your successor. Meet with the chosen candidate to discuss a transition time line, compensation and other important issues. Also sit down with those not selected and explain your choice. Ideally, these individuals can stay on to provide the aforementioned management depth. Some, however, may choose to leave or be better off working elsewhere. Be forewarned: This can be a difficult, emotional time for family members.
7. Work with your successor on a well-communicated transition of power. Once you’ve picked a successor, he or she effectively becomes a business partner. It’s up to the two of you to gradually shift power from one generation to the next (assuming the business is staying in the family). Don’t underestimate the human element and how much time and effort will be required to make the succession work.
Contact H2R CPA at 412-391-2920 or email@example.com if you have questions regarding Succession Planning for your business. Our team would be pleased to provide a complimentary consultation.
by H2R CPA
For some business owners, succession planning is a complex and delicate matter involving family members and a long, gradual transition out of the company. Others simply sell the business and move on. There are many variations in between, of course, but if you’re leaning toward a business sale, here are seven ways to prepare:
1. Develop or renew your business plan. Identify the challenges and opportunities of your company and explain how and why it’s ready for a sale. Address what distinguishes your business from the competition, and include a viable strategy that speaks to sustainable growth.
2. Ensure you have a solid management team. You should have a management team in place that’s, essentially, a redundancy of you. Your leaders should have the vision and know-how to keep the company moving forward without disruption during and after a sale.
3. Upgrade your technology. Buyers will look much more favorably on a business with up-to-date, reliable and cost-effective IT systems. This may mean investing in upgrades that make your company a “plug and play” proposition for a new owner.
4. Estimate the true value of your business. Obtaining a realistic, carefully calculated business valuation will lessen the likelihood that you’ll leave money on the table. A professional valuator can calculate a defensible, marketable value estimate.
5. Optimize balance sheet structure. Value can be added by removing non-operating assets that aren’t part of normal operations, minimizing inventory levels, and evaluating the condition of capital equipment and debt-financing levels.
6. Minimize tax liability. Seek tax advice early in the sale process — before you make any major changes or investments. Recent tax law changes may significantly affect a business owner’s tax position.
7. Assemble all applicable paperwork. Gather and update all account statements and agreements such as contracts, leases, insurance policies, customer/supplier lists and tax filings. Prospective buyers will request these documents as part of their due diligence.
Succession planning should play a role in every business owner’s long-term goals. Selling the business may be the simplest option, though there are many other ways to transition ownership.
Contact H2R CPA at 412-391-2920 or firstname.lastname@example.org for more information related to selling your business, including succession planning, business valuation, tax planning or due diligence. Our team would be pleased to provide a complimentary consultation.
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