Below is an article that was written by Chris Gaetano last week in the Trusted Professional (The Newspaper of the New York State Society of Certified Public Accountants). The article discusses major changes that the Department of Labor is implementing regarding changes to overtime and worker classifications. These are very technical accounting and legal issues, and it is strongly recommended that you talk to your trusted advisors regarding the changes, as it may have a tremendous impact on your business. Feel free to contact us regarding these new regulations for any questions or concerns.
DOL Takes Aim at Overtime, Worker Classification with New Directives
By: Chris Gaetano
Published Date: Sep 22, 2015
The U.S. Department of Labor (DOL) is cracking down on companies that try to circumvent federal regulations on overtime eligibility and worker classification, in a push that could hold significant consequences for a CPA’s business clients, as well as for his or her own firm. The department has taken on the hot-button issues in recent months, with a two-pronged attack.
First, in July, it released a proposal that would radically expand workers’ eligibility for overtime. Under current regulations, employees are generally considered exempt from overtime if they meet each of the following criteria: They’re paid a predetermined and fixed salary; they earn $23,660 or more; and they have a job that primarily involves executive, administrative or professional duties.
But, after a review mandated by President Obama, the DOL said the wage threshold is unacceptably low and had not been adequately updated since the ’70s. In a fact sheet accompanying the proposal, the department noted that President George W. Bush’s administration had increased the threshold slightly, but called the bump “weak.”
As a result, the DOL said, “an exception to overtime eligibility originally meant for highly-compensated executive, administrative, and professional employees” is now applied to lower-level workers, such as fast food and convenience store managers, whose wages would fall below the poverty level for a family of four.
Under the proposed rules, the exemption threshold would be more than doubled, jumping from $23,660 a year to $50,440 a year. In addition, the salary requirement for determining who counts as a “highly-compensated employee”-a category that is also exempt from overtime rules-would be increased from $100,000 a year to $122,148. Both thresholds would be automatically adjusted every year, either by a fixed amount, yet to be determined, or alongside the consumer price index.
Although, in its proposal, the DOL discussed the possibility of counting nondiscretionary bonuses as part of salary and solicited feedback on the nonsalary portions of the three-part exemption test, the department did not propose any specific regulatory changes on either matter. The open comment period for the proposed rules ended on Sept. 4.
Just a few weeks after it published the proposed overtime rules, the DOL released a 15-page memo intended to clarify who, exactly, is considered to be an employee and who is an independent contractor.
The misclassification of employees as independent contractors, the DOL wrote, is an increasingly common affair, in part because of widespread business restructurings. But the consequences, it said, can be deeply impactful, not only for the employees who are denied workplace protections, but for the government, which could see lower tax revenues, as well as for the businesses that do follow the rules, since they may encounter an uneven playing field.
In the past, determining the difference between employees and independent contractors often hinged upon what’s called the “control test,” which asks: To what degree is the business able to control the worker and the nature of the work that he or she does?
But according to the DOL, while the control test should still be a factor, it shouldn’t be the only one. Instead, the department wants businesses to use several different standards that fall under what it calls the “economic realities test,” which focuses on whether the worker is economically dependent on the employer or is in business development services for himself or herself. A worker who is economically dependent on an employer would be considered an employee.
Questions used in the test include, “Is the work an integral part of the employer’s business? Is the relationship between the worker and the employer permanent or indefinite? What is the nature and degree of the worker’s control?”
When employers go through the process, the DOL said, they’ll likely find that “most workers are employees.”
Assessing the impact
All told, the two directives will affect millions of workers and their bosses. The DOL estimates that just under 5 million workers who are currently ineligible for overtime will be folded into the proposed regulation, and an additional 2 million will be eligible for health care and other benefits. What’s more, according to a report released by the U.S. Government Accountability Office (GAO) in April, independent contractors are a sizable part of the workforce, making up 12.9 percent. Contingent workers, as a whole, make up 40.4 percent.
Still, sources predict that the more difficult adjustment for employers will likely be the proposed overtime rules, as the classification guidelines are less of a departure from existing practice.
Avery E. Neumark, who is the partner-in-charge of his firm’s employee benefits and executive compensation practice, said that while the classification guidelines reflect a “more aggressive position” by the government, the economic realities test isn’t substantially different from the control test that employers had already been using.
What the guidelines do, he continued, is underscore that if businesses want to classify someone as an independent contractor, they had better be certain that it’s the true nature of the relationship, which means they would essentially use the W-2 worker as their baseline.
Peter H. Frank, chair of the NYSSCPA’s Entertainment, Arts and Sports Committee, agreed that the classification guidelines were not all that different-the rules, he said, have erred on the side of treating workers as employees rather than independent contractors for quite some time. He did, however, note that the DOL’s guidelines may change how people look at those who work from home.
“Many [employers] think, ‘Well, they’re working out of their home, so we’re not controlling them,’ but if the nature of the work they perform is no different than what they would be doing if they were coming into the office, businesses need to be careful,” he warned.
But when it comes to overtime eligibility, many employers and their accounting staffs have said that the pending expansion won’t come easily and could trigger a number of unintended consequences as businesses try to cope.
For one thing, said David G. Young, a managing partner in the Rochester area, the measure will disproportionately impact small businesses, which may end up reconsidering whether or not to hire employees or grow their companies, in the face of increased costs.
Small business owners, he said, “may ask themselves, ‘If I pay all this overtime out, why even own a business?’ and, as a result, could [make] decisions that will ultimately have the opposite effect of what the government wants.”
Another possibility, according to Scott Sanders, co-chair of the Nassau Chapter’s Small Practice Unit MAP Committee and a managing partner at his firm, is that companies may rethink their scheduling practices to avoid tripping the overtime regulation. For example, he said, because overtime must be paid on the regular payday for the pay period in which the wages were earned, “the employer can either delay giving the work to this employee until the subsequent week, or give the work to another qualified employee whose hours are under the 40-hour work week.”
Moreover, the increased costs may be passed on to consumers, as entities look to minimize the impact.
David J. Wolfson, a past chair of the NYSSCPA’s Hospitality Industry Committee, said that he recently met with a client who owns several fast food franchises and had already concluded that he would have to raise prices to comply with the proposal. In addition to the new overtime rules, Wolfson pointed out, the restaurant and hospitality industry is experiencing mounting wage pressure on other fronts, including the recent move by New York state to increase the minimum wage for fast food workers.
Though Wolfson did feel that the overtime exemption was due for an update, and that the salary level proposed “seems fair,” he called the DOL’s estimate that between $1 billion to
$2 billion will be transferred from employer profit to employee salary as a result of the proposal “staggering.”
Angelo Amador, the senior vice president of labor and workforce policy at the National Restaurant Association, had even stronger words for the measure, which he characterized as “a bad idea” that doesn’t take regional differences into account.
“While $50,000 is something that a restaurant manager in, let’s say, New York City or San Francisco will easily meet, the feedback I’m getting is in rural areas of the country, they would not [be able to] meet that,” he said.
Amador added that some restaurants may simply shift their managers from salaried to hourly work, and that the regulation may accelerate the ongoing trend of automating restaurant service, since owners might find it cheaper to get new technology than to pay the increased overtime.
But it may not just be a CPA’s clients that are affected by the proposed overtime rules. Sanders said that CPA firms themselves, especially smaller ones, would also be impacted. After all, he pointed out, smaller firms have a higher percentage of administrative staff whose wages fall under the $50,440 threshold.
As a result, he explained, firms may need to consider taking on additional staffing in order to keep the administrative workers under the 40-hour threshold-particularly during busy season-and keep the firm’s payroll costs to a minimum. While that would bring another set of costs for training, extra software licenses and even desk space, he added, it would likely be lower than the cost of actually paying out the overtime under the proposed regulation.
Firms, he said, would need to simply brace themselves and “include these additional costs when factoring in fee increases for 2016.”
Young agreed that the overtime proposal could be an issue for CPA firms, adding that he doesn’t know anyone in his practice who works fewer than 50 hours a week during tax season. Though he said his own firm has been paying overtime, and that it generally wouldn’t be affected by the potential regulation, he believed others would see increased costs and, possibly, legal challenges.
This would not be without precedent: Within the past few years, the Big Four firms KPMG, Deloitte and PricewaterhouseCoopers have all been targets of class action lawsuits that alleged they did not pay their audit associates for overtime.
The Deloitte case was dismissed in 2012. When the plaintiffs attemtped, this past September, to get it recertified, a federal judge denied the motion, saying that they were too varied in level of supervision and duties to consider the case as a class action. The KPMG case was dismissed by an appeals court last year after a judge concluded that as “learned professionals who perform work requiring advanced knowledge,” the associates were exempt from overtime under the Fair Labor Standards Act. And PwC settled its case in February 2015, making a gross payment of $5 million.