Today I’m discussing a topic that could impact millions of American workers and the companies that employe them. If you have salaried workers, especially in executive, administrative, or professional roles, you’ll want to pay close attention.
On April 23, the Biden administration announced a significant change in federal rules regarding overtime pay. Starting July 1, the minimum salary that allows employees to be exempt from overtime pay will increase from $35,568 to $43,888. But that’s not all! In January 2025, it will rise even further to $58,656.
This change means that many more workers will be eligible for overtime pay, and it’s a phased approach to ensure a smooth transition. By 2027, the threshold will be adjusted every three years based on the latest wage data.
Acting United States Secretary of Labor Julie Su, emphasized the importance of this change, saying, ‘This rule will restore the promise to workers that if you work more than 40 hours in a week, you should be paid more for that time.’ She pointed out that too often, lower-paid salaried employees are working longer hours without additional pay.
So what does this mean in numbers? The Labor Department estimates that the July change will make an additional 1 million workers eligible for time-and-a-half pay. By January, another 3 million employees will benefit from this rule change.
It’s also important to note that U.S. regulations require employers to pay eligible workers one-and-a-half times their regular rate for each hour worked over 40 hours a week. Currently, employees earning more than $107,432 are automatically exempt from overtime pay, but with the new rule, that cutoff will increase to $151,000.
Please also remember that your state may have more stringent overtime rules, so be sure to follow the most favorable for your staff. For example, CA requires overtime if a worker is on the clock more than 8 hours in a day rather than the federal level of 40 in a week.
Many are under the false impression that if you pay someone a salary, you don’t have to pay overtime. This can be a costly error. The term for failing to pay overtime to those who qualify is called wage theft.
Industries that experience the most wage theft include:
- Childcare
- Factory workers
- Call centers
- Internships
- Construction
- Foodservice
- Landscaping
- Nursing
- Home care
- Retail
- Hospitality
- Janitors
- Parking attendants
- Restaurants
- Textile workers
Common ways that employers violate state and federal law include:
- Claiming that because an employee is salaried, they don’t qualify for overtime
- Purposely excluding some overtime hours when calculating pay
- Having workers do additional work while not on the clock
- Using round-down time clocks
- Denying overtime pay based on an employee’s title in the company
- Basing overtime on a two-week pay period of 80 hours and not the legally required 40-hour work week.
- Intentionally leaving out regular rate payments for overtime, like bonuses or commissions, which results in a lower overall rate of pay.
Another issue that often occurs is the misclassification of an employee as an independent contractor. Whether it’s purposeful to avoid payroll taxes, or an oversight due to a lack of understanding of the guidelines, it also can prevent employees from being paid wages they deserve.
It is imperative that you classify your worker as an employee if they fall under the federal and state classification rules.
I’ve shared this information in a past podcast episode, but as an overview, I’ll explain the guidelines regarding classification rules so you are aware what the federal government looks at to determine if a worker should be an employee. Remember that many states have more stringent requirements, so you must follow the rules that are most beneficial to the worker.
There are 3 factors the government uses to determine staff classification:
1. Behavior Control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.
2. Financial Control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job. These include things like how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.
3. Type of Relationship refers to facts that show how the worker and business perceive their relationship to each other. Are there written contracts or employee type benefits (for instance, pension plan, insurance, or vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?
Let me give a little more insight into each of these factors:
The behavioral control factors fall into the categories of:
- Type of instructions given
- Degree of instruction
- Evaluation systems
- Training
Let me break this down even further.
All of the following are examples of types of instructions about how to do work.
- When and where to do the work.
- What tools or equipment to use.
- What workers to hire or to assist with the work.
- Where to purchase supplies and services.
- What work must be performed by a specified individual.
- What order or sequence to follow when performing the work.
Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.
But note that the amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if you have the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.
Training
If you provide the worker with training on how to do the job, this indicates that you want the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship.
Next, let’s look at the financial control factors.
Financial control refers to facts that show whether or not you have the right to control the economic aspects of the worker’s job.
The financial control factors fall into the categories of:
- Significant investment
- Unreimbursed expenses
- Opportunity for profit or loss
- Services available to the market
- Method of payment
I’ll review these in more detail.
An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.
Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.
The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to have a loss. The possibility of incurring a loss indicates that the worker is an independent contractor.
An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
If the worker uses your equipment, gets a regular paycheck (especially if using a timesheet or clock to track time) and doesn’t have the opportunity to grow their income by working with other businesses, they are most likely an employee and should be treated as such.
The final factor the IRS looks at to determine if a worker should be classified as an employee or contractor is Type of Relationship.
Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
The factors generally fall into the categories of:
- Written contracts
- Employee benefits
- Permanency of the relationship
- Services provided as key activity of the business
Here’s a bit more info on each of those.
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self-employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.
Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.
If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities.
Now that we’ve looked at the factors that determine if a worker is an employee, and we know certain employees are entitled to overtime in some cases, let’s look at when overtime is not required. As mentioned earlier I’ve recorded an episode on this topic in the past, but I’m going to go over some of those guidelines again today.
The first is the Executive Exemption.
To qualify for this, ensure all these criteria are met:
- The employee must earn at least $844 per week on a salary basis beginning July 1 which increases to $1128 January 1st.
- The employee’s main job must be managing the enterprise or a recognized department/subdivision.
- The employee must regularly direct the work of at least two full-time employees (or their equivalent).
- The employee must have the authority to hire or fire employees, or their recommendations on hiring, firing, or promotions must be given particular weight.
The next exemption is for those classified as Administrative. To claim this exemption, ensure the following criteria are met:
- The employee must earn the minimum weekly wage
- The employee’s main job must involve office or non-manual work directly related to the management or general business operations of the employer or its customers.
- The employee’s role must include exercising discretion and independent judgment on significant matters.
Third is the Professional Exemption. There are two types here: learned and creative professionals.
The Learned Professional must meet the following:
- The employee must earn at least $844 per week on a salary basis beginning July 1 which increases to $1128 January 1st.
- The employee’s job must require advanced knowledge, predominantly intellectual in character, involving discretion and judgment.
- The advanced knowledge must be in a recognized field of science or learning.
- This knowledge is usually acquired through a prolonged course of specialized intellectual instruction.
For a Creative Professional, they must meet the following:
- Meet the same minimum earnings as the other categories discussed.
- The employee’s job must require invention, imagination, originality, or talent in an artistic or creative field.
An exemption for a Computer professional requires:
- The employee must earn either $844 (or the higher $1128 as of January) per week on a salary/fee basis or at least $27.63 if paid hourly.
- The employee must be employed as a computer systems analyst, programmer, software engineer, or a similar role.
- This includes systems analysis, programming, software development, and similar tasks.
For those who employee Outside Sales staff:
- The employee’s main duty must be making sales or obtaining orders/contracts for services or facility use.
- The employee must be regularly working away from the employer’s place of business.
Next let’s look at Highly Compensated Employees:
- If an employee earns $151,000 or more annually and regularly performs one of the duties of an exempt executive, administrative, or professional employee, they are exempt from the overtime rule.
It’s important to note that these exemptions only apply to white-collar employees. Blue-collar workers, such as those in production, maintenance, and construction, are entitled to minimum wage and overtime pay regardless of their earnings.
Remember, the Fair Labor Standards Act sets minimum standards, but state or local laws, or collective bargaining agreements, can offer greater protections. Be sure you always meet the highest applicable standard.
Failing to follow these guidelines can result in civil penalties, so be sure to classify workers correctly and pay them overtime when required unless they meet one of the exemptions discussed.
To recap:
The new wage threshold as of July1 is $43,888
The new threshold beginning January 2025 will be $58,656
Adjustments will occur every three years starting in 2027
The cutoff for an automatic exemption is increased to $151,000
These changes aim to ensure fair compensation for the extra hours worked and bring more equity between salaried and hourly employees. If you think you might be affected by these changes, it’s a good idea to check with your HR department or a labor expert.
Phew! That’s a lot of information to know regarding the overtime rules. If you’d like to review the fact sheet, I’ll put a link in our resources which you can access from a link in the show notes. I’ll also include blogs I’ve written regarding employee versus contractor classifications that review the factors I discussed today to determine of workers should be employees on payroll.
Thanks for tuning in, and don’t forget to subscribe to my Biz Help For You podcast so you don’t miss updates on important changes that affect your business.
LINKS for the resources page:
Written Blogs:
Employee VS Contractor (Costs):
Employee VS Contractor (Determining Factors): https://affordablebookkeepingandpayroll.com/?p=1010
Employee VS Contractor (Behavioral Control):
Employee VS Contractor Part 4 (Financial Control):
Employee VS Contractor (Type of Relationship):
Department of Labor Overtime Exemption Fact Sheet:
https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime
