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Interactive Training for Government AgenciesOvertime for White Collar Workers Final Rule
Overview and Summary of DOL's Final Ruling on Overtime for White Collar Workers
What does DOL's Final Ruling on Overtime for White Collar Workers do?
What is the impact of DOL's Final Ruling on Overtime for White Collar Workers?
One of the most basic tenets of our economy is that a hard day’s work should lead to a fair day’s pay. For much of the past century, a cornerstone of that promise has been the idea that you’re paid more if you work more than 40 hours in a week. Today, we are taking action that will make that promise a reality again for more of America’s workers, too many of whom have been left working long hours for no additional pay, taking them away from their families and civic life without any extra compensation.
It wasn’t always this way. The passage of the Fair Labor Standards Act gave most Americans the right to a minimum wage and time-and-a-half pay for more than 40 hours of work in a week. These rules apply to most hourly and salaried workers, but not to some white collar workers whose salaries and duties exempt them from the overtime pay requirement.
The white collar exemption was originally meant for highly-paid workers who had better benefits, job security and opportunities for advancement. Unfortunately, when left unchanged, the salary threshold is eroded by inflation every year. It has only been updated once since the 1970s—in 2004, when it was set too low. As a result, the threshold fails to help employers identify workers who are entitled to overtime pay, and it has left millions without overtime protections to which they should be entitled. This outdated salary threshold provides overtime protections to just 7 percent of full‐time salaried workers today based on their pay, compared with 62 percent in 1975. In fact, the white collar exemption salary level set in 2004; $455 per week or $23,660 a year—means even workers earning less than the poverty line for a family of four may earn too much to automatically qualify for overtime.
In March 2014, President Obama directed the Secretary of Labor to update the overtime regulations to reflect once again the intent of the Fair Labor Standards Act, and to simplify and modernize the rules so they’re easier for workers and businesses to understand and apply. The Department of Labor conducted months of extensive consultations with employers, workers, unions, and other stakeholders to develop the proposed rule, and it carefully reviewed more than 270,000 comments from the public in order to develop the final rule.
Today, President Obama and Secretary Perez announced that the Department of Labor’s final rule will automatically extend overtime pay eligibility to 4.2 million workers. The rule will entitle most salaried white collar workers earning less than $913 a week ($47,476 a year) to overtime pay. This long-awaited update will provide a meaningful boost to workers, and it will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.
What does the DOL's Overtime for White Collar Workers do?
The final rule will:
- Put more money into the pockets of many middle class workers—or give them more free time. By increasing the number of workers who are eligible for overtime when they work more than 40 hours in a week, employers will have a choice. They can either increase their employees’ salaries to at least the new salary threshold, pay workers the overtime premium for extra hours, or limit their work to 40 hours in a week.
- Prevent a future erosion of overtime protections and ensure greater predictability. The rule will automatically update the salary threshold every three years based on wage growth over time. This means it will work better in the future by continuing to protect the workers it was meant to protect. Employers will be able to adapt more easily because they will know when the salary updates will happen and how they will be calculated, and they will be able to estimate the amount of the salary update.
- Strengthen overtime protections for salaried workers already entitled to overtime and provide greater clarity for workers and employers.
- Establishing that white collar workers are not entitled to overtime pay involves clearing two hurdles: (1) assessing whether their salary is above the threshold and (2) applying a “duties test” to ensure that they have the kind of job that Congress meant to exclude from overtime protections. With the new, higher threshold, 8.9 million overtime-eligible salaried workers—and their employers— will be able to determine more easily that they should be receiving overtime pay. Because their salaries are below the new threshold, their employers will no longer have to figure out whether they pass the “duties test,” and they will no longer have to wonder if that test has been applied appropriately. This will simplify application of the rules and provide a bright line that protects the set of workers our workplace laws intended to protect.
- Improve work-life balance. Too many salaried, white collar workers today are overworked, and their employers have no incentive to limit hours because they aren’t required to provide additional pay when employees work more hours. Under this rule, employers will have a renewed monetary incentive to support work-life balance. Many workers will put in fewer hours without seeing a reduction in pay, giving them more time to spend with their families and in their personal pursuits.
- Increase employment by spreading work. The better work-life balance for workers who will now be eligible for overtime protection may create new opportunities for other workers. Some employers will hire additional workers—or give more hours to part-time workers—to cover work currently done during overtime hours.
- Improve workers' health. Research indicates that working long hours is bad for many workers’ health and increases the risk of injury. Giving workers more down-time can help improve health and prevent injury.
- Increase productivity. The rule will promote improved productivity through workers’ improved morale and reduced turnover.
Summary of DOL's Overtime for White Collar Workers Final Rule
Summary of the final rule:
- Salary threshold. The final rule will raise the salary level for the first time since 2004. This increase will go into effect on December 1, 2016.
- Standard salary level. The final rule will raise the standard salary threshold to equal the 40th percentile of weekly earnings for full‐time salaried workers in the lowest‐wage Census region, currently the South. This will raise it from $455 a week to $913 a week ($47,476 for a full‐year worker). This means that 35 percent of full‐time salaried workers will be automatically entitled to overtime, based solely on their salary.
- Highly Compensated Employees (HCE) salary level. The rule also updates the total annual compensation level above which most white collar workers will be ineligible for overtime. The final rule raises this level to the 90th percentile of full‐time salaried workers nationally, or from the current $100,000 to $134,004 a year.
- Automatic updates. Every year the thresh‐ old remains unchanged, it covers fewer and fewer workers as wages overall increase over time. The Department’s final rule will fix this by automatically updating the salary threshold every three years, be‐ ginning January 1, 2020. Each update will raise the standard threshold to the 40th percentile of full‐time salaried workers in the lowest‐wage Census region, estimated to be $51,168 in 2020. The HCE threshold will increase to the 90th percentile of full‐time salaried workers nationally, estimated to be $147,524 in 2020. The Department will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019.
- Bonuses, incentive payments, and commissions. The final rule will allow up to 10 percent of the salary threshold for non‐HCE employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. This recognizes the importance these forms of pay have in many companies' compensation arrangements, particularly for managerial employees affected by the final rule. This is a new policy that responds to robust comments received from the business community on this matter.
- Duties test. The final rule does not make any changes to the “duties test” that determines whether white collar salaried workers earning more than the salary threshold are ineligible for overtime pay. But fewer employers and workers will have to worry about its application because the higher salary threshold means more workers' entitlement to overtime pay will be clear just from their salaries. For workers with salaries above the updated salary level, employers will continue to use the same duties test to determine whether or not the worker is entitled to overtime pay.
What is the Impact of DOL's Final Rule on Overtime for White Collar Workers?
Impacts of the rule:
- Workers directly affected. 4.2 million salaried workers will be affected by this rule based on their salaries. These workers are currently ineligible for overtime. The Department estimates that most of them (4.1 million) will become eligible for overtime when they work more than 40 hours (i.e., they will be converted to overtime-eligible status), while others (100,000) will receive a raise so that their salary is above the new threshold.
- Workers indirectly affected. 8.9 million salaried workers (3.2 million blue collar and 5.7 million white collar workers) are currently eligible for overtime because, although their salaries are above the current salary threshold, their duties do not meet the exemption for executive, administrative, or professional workers. Under the final rule, their eligibility for overtime will become clearer because their salaries will fall below the new threshold and no assessment of their duties will be necessary. Of the 5.7 million white collar workers, approximately 732,000 are overtime-eligible, but their employers don’t recognize them as such and so do not pay them the overtime they deserve when they work more than 40 hours. This update will give all of these workers the peace of mind in knowing they are properly classified as eligible for overtime.
- More income for working Americans. As a result of this rule, an extra $1.2 billion a year will go into workers' pockets (those earning between $455 and $913 a week). These benefits will flow to many middle class workers and their families.
- More than half (56 percent) of affected workers are women.
- 61 percent are age 35 or older.
- 82 percent have at least some college, and more than half (53 percent) have a college degree or more.
- In addition, 2.5 million children have at least one parent who will gain overtime protections or get a salary raise.
- More appropriate salary threshold. While the current threshold ($455) is less than the poverty level for a family of four and just 1.6 times the federal minimum wage, the new standard salary is much more appropriately set. It will be 3.1 times the federal minimum wage for a full-time worker and twice the poverty level for a family of four.
For more information on the Overtime Final Rule or to download this article, go to www.dol.gov/overtime.
The Three Bottom Lines
By: Bill Kay
The question I am most asked on the subject of financial analysis is “What should you look at on financial statements to determine the true health of a company?” My answer is to look at the trend over the last 3 to 5 years on the Three Bottom Lines to quickly analyze the financial statements of any company to see its true financial health. What are the Three Bottom Lines?
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Net Profits
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Cash Flow From Operations
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Return On Assets (ROA)
Net Profits (The bottom line from the Income Statement)
The Income Statement gives us one important perspective on the health of a business—it’s profitability over a specified calendar period. Think of an Income Statement as a movie of all of the sales or revenue that the company generated during a period such as a month, a quarter, or a year. Remember that sales/revenue starts at zero at the beginning of the company’s fiscal year. The top line of the Income Statement is created as products are sold or services are delivered to customers. At the end of a period, the movie stops and all of the sales and revenues are compared or matched to all of the costs and expenses to determine if money was made or lost.
In accrual accounting, the Income Statement does not look at the cash coming in or going out of a business, it only looks at what was actually sold against what it cost. We might not have received the cash from the customer yet; we might not have paid all of the expenses yet. So, the bottom line (net profits or net earnings or net income) is not cash. Remember this when you look at a company’s bottom line.
Sales & Revenue – Costs & Expenses = Net Profits
It’s always important to look at the trend of the top line (sales/revenues) and the bottom line (net profits) over a period of years. Also look at the Return On Sales (ROS), which is calculated by dividing the bottom line (net profits) by the top line (sales/revenues). This measures the company’s efficiency in generating profits for a given amount of sales. Is ROS or Net Profit Margin going up or down over the years? We can also use ROS to compare companies against competitors in their industry. What percentage are they making on the bottom line for each dollar sold on the top line against their competitors?
Remember that profits are not the same as cash. The analogy that I like to use is that profits are very important, but a company can go for a while without generating profits. Profits are like food. All of us can go for a while without eating, but sooner or later, we have to eat to live. It’s the same with any business. More important than profits is cash. Remember the old saying that “Cash is King.” Cash is like oxygen. How long can we live without oxygen? Not very long. How long can a business operate without cash? Not very long. When a business runs out of cash, checks bounce, the lights go out, and the company either finds more cash or goes into bankruptcy.
Cash Flow from Operations
The Cash Flow Statement has become one of the most important financial statements since the Financial Accounting Standards Board (FASB) required all public companies to include one in their annual reports back in 1987. The indirect Cash Flow Statement starts with net profits (the bottom line from the Income Statement) and then reconciles net profit to operating cash flow according to Generally Accepted Accounting Principles (GAAP).
The indirect way to create a Cash Flow Statement is to look at three areas of cash flow:
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Cash Flow from Operations (actual cash generated from operations of the business)
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Cash Flow from Investing (cash spent or generated on buying or selling property, plant, or equipment)
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Cash Flow from Financing (cash generated or spent on financing the business through debt or equity)
Cash Flow from Operations is the key indicator of successful financial management of a business. We always want this number to be higher than the Net Profits of the company. When it is higher, it shows that the company’s managers have generated cash by running the business efficiently.
The Cash Flow from Operations looks at how much net cash is flowing into the business, independent of what the company receives from lenders and investors and independent of what the business spent on property, plant, and equipment and other investments. It shows the actual cash generated from operations of the business. This number is a real number based on actual cash coming in and going out of the business.
Return On Assets (ROA)
Usually when we use the term “return” we are looking at the bottom line or net profits of a company against something else, in this instance, against assets. Where do we find the total assets of a company? The total assets are found on the Balance Sheet. Total assets are everything that the company owns. So how much money was made on all of those assets? How much profit did the company generate with all of the assets owned?
ROA is calculated by taking net profits (bottom line) from the Income Statement and dividing it by the average assets the business owns from the Balance Sheet. Or, for all of the assets of the business, how much money did these assets generate in profits? Are the managers using everything the business owns (assets) to generate a good profit compared to other companies in their industry? This is an excellent ratio to use to compare a company against its competitors in its industry.
Net Profits / Average Assets = Return On Assets
Do not forget to look at the trend in all Three Bottom Lines the next time you want to analyze the health of a company. Benchmarking these three key indicators against the best companies in an industry is a wonderful, quick way to determine the true health of a company.
More in-depth information can be found in the following resources.
Finkler, Steven A., Finance & Accounting for Nonfinancial Managers, 1996 Prentice-Hall, Inc.
Gill, James O. and Moira Chatton, Understanding Financial Statements, 1999 Crisp Publications, Inc.
By: Bill Kay
© 2015 Alliance Training and Consulting, Inc.
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The Construction Industry and the Tax Gap
Not reporting or under-reporting business income, including income from construction activities, contributes to the tax gap.
Resource: IRS 22, August 2007
Contractors, subcontractors, as well as individual workers need to be aware of everything that counts as income, and proper accounting methods, so they pay their fair share of taxes. They also need to be aware of all deductible expenses so they do not overpay their taxes. This fact sheet is the 15th in a series to help reduce the tax gap by helping taxpayers better understand the tax code. The tax gap is the difference between the amount of taxes that should be paid in a given year, and the amount actually paid voluntarily and in a timely way.
Income
Contractors, subcontractors, and workers must pay taxes on income received for all work, including side jobs and work that is paid for with cash. This includes work in exchange for credit on a bill. It also includes work that is done in exchange for goods or services in a barter exchange. You are required to report your income even if a Form 1099 or a W-2 is not issued to you.
Income and expenses are reported on tax returns based on one of two accounting methods, which include either the cash method or the accrual method. Either method must clearly reflect a consistent treatment of income and expenses from year to year.
Most construction businesses use two different tax accounting methods, one for long-term contracts and one overall method for everything else, which is often the accrual method. A special section of the IRS web site can help companies pick the best accounting method for their needs.
Accrual Accounting
The accrual method requires reporting income in the year earned and expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year. If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income.
Common accrual methods used in the construction industry are the “completed contract method” and the “percentage of completion method.” Under the completed contract method, all income and expenses from the contract are reported in the year the project is completed and accepted by the customer. Under the percentage of completion method, income is reported in proportion to the percentage of costs incurred to date when compared to total estimated costs for the contract.
Cash Accounting
The cash method requires reporting cash receipts as income when received and expenses when paid. Again, if you use the cash method for reporting your expenses, you must use the cash method for reporting your income. Receipt of income occurs when a contractor has unrestricted access to income, including income earned. Contractors who could have received money in one year, but chose not to receive the money until a later year, must include the money as income in the first year, as if it had been actually received in that year.
Two types of businesses are not permitted to use the cash method of accounting. These include a corporation and/or a partnership with a C corporation as a partner, with average annual gross receipts exceeding $5 million, and a business with substantial purchases of materials, generally 10 to 15 percent of its gross income.
Additional information on income and accounting methods is available in Publication 538, Accounting Periods and Methods.
Notice: Alliance Training and Consulting, Inc. provides the contents of this page for general purposes only. You should not substitute this information for individual consultation with a qualified professional in the field. Alliance Training and Consulting, Inc. is not engaged in rendering legal services.
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Why Business Budgets Fail
By: Dale Mask
The budget situation:
Managers develop unrealistic budgets. Does this sound familiar? The year is not half over and the manager is already trying to figure out why and how he/she is already over budget.
The result:
Over spending, poor results, less than desirable bottom line.
The budget solution:
Managers must do a better job of developing and managing budgets.
Here are the primary reasons managers miss their budgets:
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Managers don’t know how to budget: For the most, managers are not taught how to budget. Budgeting is one of the least-liked management tasks so budgets do not get a lot of attention.
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Managers do not understand the financial aspects of their businesses: Few managers take the time to review and understand the financial dynamics of their organization.
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Managers fail to get the right information: Because most managers hate to budget, they often do not make the effort to gather the information needed to develop an effective and achievable budget.
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Managers adjust budgets without redefining expectations: Often, especially in today’s economy, after the first draft is submitted, top management asks for reductions in expenses to get the overall budget in line. “Tweaking” is normal. However, when managers cut expenses without redefining expectations related to what services or deliverables have to be cut to achieve the new plan, the budget is doomed for failure.
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Managers submit “overly precise” budgets: This occurs when the manager spends hours gathering the details for all the projects, goes through exact calculations for salaries, increases, and benefits for his staff, details every new project planned for the new year, and submits a budget that is perfect. Managers need to remember that the budget is a forecast. Perfect budgets are rarely achieved. Without budget training, managers often are too exacting or too “loose” in creating the budget. Managers need to balance the science and the art of budgeting.
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Managers only use historical data: Historical information on sales and costs is important, but past years is not your only guide. You must also consider your future plans and what your competitive environment and economic environment is apt to look like.
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Managers fail to administer the budget effectively: As business needs and economic realities change, budgets must be adjusted. Managers know how to make good budget decisions and communicate with senior management on the impact of altered plans on bottom line results.
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Managers fail to understand finances: Too often, managers have never received training on business finance. Failure to understand basic business finance can make it impossible to put together a realistic budget – much less administer it.
There are a number of reasons why managers often fail to hit their budgets, but it does not have to be that way. Developing and managing can be easier than you think. But without budget training for managers, developing budgets that are both aggressive and achievable will be difficult.
By: Dale Mask
© 2015 Alliance Training and Consulting, Inc.
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Avoid Costly Use Tax Traps
A company’s greatest exposure lies hidden in use tax traps.
Case Study One:
An employee orders a special laptop brief case over the internet. The invoice comes in with no tax charged. The employee who ordered the brief case has not been trained on sales and use tax liabilities and therefore they think they have SAVED the company money because they did not have to pay tax. When filling out their expense report, they include this purchase for reimbursement. They did not flag accounts payable for a use tax accrual on this purchase. Accounts payable processes the expense reimbursement report without accruing for the use tax liability. When this error is discovered by auditors, it will add to the statistical sampling error rate.
Case Study Two:
Another common use tax trap is purchasing tangible personal property for resale, and then giving it a different use than was originally intended.
To help make the point, let’s say we go to Las Vegas for vacation. While you are there, you do some gambling. While you are gambling, the casino offers you a “free” drink. Since this drink was not sold to you, no tax was collected on the drink. Therefore, the casino must keep track of their comp drinks/meals and place a value on them for their use tax accrual.
The same would hold true for parts that are purchased for resale but are used to repair a customer’s property under warranty, and the warranty was not taxed at the inception of the sale. Since the customer is not paying for the part because it is covered under their warranty agreement, the company will need to accrue a use tax on this part.
Notice: Alliance Training and Consulting, Inc. provides the contents of this page for general purposes only. You should not substitute this information for individual consultation with a qualified professional in the field. Alliance Training and Consulting, Inc. is not engaged in rendering legal services.
© 2015 Alliance Training and Consulting, Inc.
