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January 31, 2020 | Payroll Software | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis

Payroll Regulation Updates: Overtime Pay and Mobile Workers

A new year is upon us, and with it come new regulations and proposals that can have some important effects on the way employers manage their payroll operations. Among the major developments employers should keep an eye on in 2020 are updates to overtime qualifications for both blue collar and white collar workers and pending legislation aimed at accommodating an increasingly mobile workforce. Let’s take a quick look at these new considerations and what they might mean for employers.

Expanded overtime qualifications

Starting January 1, the minimum threshold for overtime pay got its first bump since 2004. The Department of Labor’s latest update to the Fair Labor Standards Act significantly raised the pay threshold for exempt workers from earning overtime, from $23,660 per year to $35,568 per year. That means that any worker earning less than $35,568 per year needs to receive time-and-a-half pay for any hours worked over 40 in a workweek.

The DOL projects that these changes will qualify more than 1.3 million previously uncovered American workers for overtime. From an HCM standpoint, this means that employers need to be more conscientious than ever about managing overtime. Paying time-and-a-half to higher-wage workers can add up quickly. In many cases, it may be more cost-efficient to hire more staff to complete projects without encroaching into overtime hours, or to adjust wages to a level that exempts workers from overtime consideration.

However they choose to address overtime issues, employers need to pay close attention to compliance. FLSA violations can incur serious fines and penalties. For instance, in a well-known 2000 case, a Massachusetts-based retail company was required to pay more than $250,000 in fines and back wages. Investigators found that managers across the company were being improperly classified as exempt and asked to work overtime hours without proper compensation.

Redefining high compensation

Speaking of adjusting wages, the definition of “highly compensated employees” has also changed with the new year. The cutoff for white collar employees whose high level of pay excludes them from overtime considerations has now been raised to $107,432 annually, up from the previous cutoff of $100,000. Up to 10% of that threshold can be made up of nondiscretionary bonuses, commissions and incentive payments. That could entail things like reimbursed expenses, unused time off, parking fees, gym memberships, and even complimentary snacks and beverages.

This change requires employers to pay even closer attention to the number of higher-earning workers. Paying time-and-a-half to workers in the six-figure range adds up quickly, so employers will likely want to be very mindful of hours management. Again, in some instances it may be more cost effective to raise their wages to meet the exemption threshold. (Note that certain fields of employment such as doctors, lawyers, and teachers are exempt from this new definition.)

Making mobile work more uniform

As the so-called “gig economy” continues to grow, employers find themselves facing a slew of new tax and payroll considerations. More roles are being staffed on a project-by-project basis, often by employees working in remote locations, further skewing the line in the worker classification discussion. The changing nature of the job landscape means that employers are dealing with a patchwork of short-term employment rules and tax requirements that vary widely state by state.

Some states require withholdings after nonresident employees have worked a certain number of hours in that state. Others determine withholdings based on the amount of money an employee makes there. Almost half the states in the union require withholdings starting the first day an employee works there, whether or not the worker resides in that state. This can be a confusing situation for employers, to the extent that some businesses refrain from hiring cross-state workers even for short-term roles, just to avoid noncompliance.

The rationale behind the Mobile Workforce State Income Tax Simplification Act (MWSITSA), versions of which are currently working their ways through both the U.S. House and Senate is to create a more uniform experience for both employers and employees. This legislation would require individuals to file state income tax returns only if they have worked in a state for 30 days or more. That threshold is intended to simplify the withholding and remittance requirements for employers who rely on nonresident workers for short-term roles. The act was introduced last February in the Senate and last September in the House, which has considered three previous versions of MWSITSA that have all stalled in session. Time will tell whether this latest edition will fare any better.

Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)