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The Impact of Proposed Overtime Rule Changes on Your Business
The U.S. Department of Labor (DOL) has put forth significant changes to overtime rules that could affect millions of salaried workers, especially those employed by small businesses. It is crucial for you, as a business owner, to understand these proposed changes and assess your current compensation arrangements to make informed decisions when the final DOL rule is adopted.
Understanding the Proposed Changes
Under the Fair Labor Standards Act (FLSA) overtime rule, employers must pay time-and-a-half for any hours worked beyond 40 in a weekly pay period, unless employees fall under the category of "exempt employees." Currently, exempt employees include executive, administrative, and professional employees who perform specific duties and earn salaries above a threshold amount of $684 per week ($35,568 annually). Highly compensated employees, with salaries over $107,432, are also exempt.
The proposed changes in the overtime rule would increase the salary thresholds to $1,059 per week ($55,068 annually) for executive, administrative, and professional employees, and $145,988 for highly compensated employees. This means that if you have an executive who falls below the proposed wage threshold increase, they would no longer be exempt, and you would be required to pay overtime for any hours exceeding 40 in a week. Additionally, the proposed changes would introduce automatic adjustments to the thresholds every three years, based on current earnings data rather than cost-of-living adjustments.
Direct and Indirect Impact on Payroll Costs
If employees who are currently exempt become non-exempt due to the proposed changes, your payroll costs will increase if they work more than 40 hours in a weekly pay period. To prepare for this, review your current staff hours to project potential increases in overtime costs. Consider the financial impact of paying time-and-a-half for additional hours worked, especially for employees who frequently put in extra hours.
Alternatively, you may choose to increase the salaries of currently exempt employees to maintain their exempt status. However, be mindful of the potential ripple effect this could have on your non-exempt employees and whether their wages need to be adjusted as well. It is essential to budget for any increase in employee compensation, as it directly affects your business's costs.
Impact on Employment Taxes
Any increase in compensation will result in additional FICA taxes for employers. This includes 6.2% for wages up to the annual Social Security wage base ($160,200 in 2023), plus 1.45% for all wages. If you choose to raise employees' wages to keep them exempt or highly compensated, your employment taxes will increase. Similarly, if employees work overtime hours without a wage increase, your employment taxes will also go up. It is important to note that the proposed increase in thresholds is likely to trigger additional employment taxes for your business.
Conclusion
While the proposed increase in thresholds may still undergo changes before the final rule is issued, it is crucial to stay informed. Take advantage of the comment period until November 7, 2023, to provide feedback, and monitor the release of the final rule. Adjust your budget and business practices accordingly, such as considering the need to raise prices to account for increased payroll expenses. By staying proactive and adaptable, you can navigate the potential impact of these overtime rule changes on your business successfully.
Conclusion: The Potential Impact of Overtime Rule Changes on a New LLC
The proposed changes to the overtime rules by the U.S. Department of Labor could significantly impact new LLCs. As these businesses are often in the early stages of growth, any increase in operating costs, such as payroll and employment taxes, can be challenging to manage.
With the proposed increase in salary thresholds, more employees may qualify for overtime pay, leading to higher payroll costs. For a new LLC, this could mean reevaluating their compensation structures, possibly increasing salaries to maintain exempt status, or budgeting for increased overtime costs. Either way, it's an added financial burden that could strain a new LLC's resources.
Additionally, the proposed changes could also lead to higher employment taxes. Whether a new LLC chooses to increase salaries or pay overtime, they'll likely see an increase in their FICA taxes. This could further strain their finances and potentially impact their growth trajectory.
However, these challenges also present an opportunity for new LLCs to demonstrate their adaptability. By staying informed, providing feedback during the comment period, and adjusting their budget and business practices accordingly, new LLCs can navigate these changes successfully.
In conclusion, while the proposed overtime rule changes may pose challenges, they also offer new LLCs a chance to showcase their resilience and adaptability in the face of regulatory changes.
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