Issue

The Summer of 2016 should bring new Department of Labor regulations that will move the minimum compensation for an “exempt” employee from $23,660 per year to $50,440* per year – is your institution ready to pay more overtime?

Situation

Saltwater Christian College (SCC), a private college exempt under Internal Revenue Code section 501(c)(3). SCC’s accounting team sets up a conference call with us to talk about the new “overtime” rules that they have been hearing about. They do not believe that they will be affected but want to know more.
We ask, “Do you have employees who are salaried who make less than $50,440 a year (or $970 per week)? They say, “Of course.” To which we reply, “Then you will be affected.”

*Note that the $50,440 may be adjusted in the final regulations due out in May or June of 2016.
Rules
From “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees

Summary

The Department [of Labor] proposes to update the regulations governing which executive, administrative, and professional employees (white collar workers) are entitled to the Fair Labor Standards Act’s minimum wage and overtime pay protections. Key provisions of the proposed rule include:
(1) setting the standard salary level required for exemption at the 40th percentile of weekly earnings for full-time salaried workers (projected to be $970 per week, or $50,440 annually, in 2016);
(2) increasing the total annual compensation requirement needed to exempt highly compensated employees to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually); and
(3) establishing a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.

The Department last updated these regulations in 2004, which, among other items, set the standard salary level at not less than $455 per week.

We suggest colleges:

Identify – those employees who are currently “salaried” (and considered “exempt”) who make less than the minimum exempt salary (in the proposed regs this was $50,400).

Modify – for affected employees the decision should be made to give them a raise, limit hours, pay overtime – and what the cumulative effects of all of that will cost (“rebudget”?).

Codify – you should rewrite job descriptions, clearly define “work”, navigate the various discrimination clauses (to be announced) in the final regulations.

Bottom Line

This is a developing issue. Final regulations are expected in May or June and will go into effect 60 days after issuance. There are myriad issues with defining “work”, paying 150% overtime, and potential discrimination rules. It makes sense to start your plan to identify, modify, and codify as soon as possible.

You should touch base with a qualified tax advisor on these items. He or she will be able to help you navigate how they may affect your school.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.