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Running a business

Look out for increased labor costs in 2020 and beyond

Every new year brings changes to laws and regulations, and 2020 may mean increased labor costs for small businesses, with three major updates:

  • Changes to overtime rules make more workers potentially subject to overtime pay.
  • Increases to minimum wage across the country.
  • A new California law narrows the definition of independent contractors.

Let’s take a look at these changes and how they might impact firm owners and their clients.

More workers subject to overtime with increase to wage threshold

Starting on Jan. 1, 2020, new rules from the Department of Labor (DOL) increased the pay threshold for overtime pay from $455 per week to $684 per week. This means that workers who were previously exempt from overtime rules may now be subject to those rules. Employees who are not exempt must be paid at least time-and-a-half for hours over 40 in a week.

To remain exempt, employees must be paid at least $35,568 per year on a salary basis, and must perform specific exempt duties as the main part of their jobs. The previous salary level had been in place since 2004.

In addition to the wage thresholds, principal duties of employees must fall into a specific exempt category. Duties are more important than job titles, so employers can’t just slap an exempt title, such “executive” or “administrative,” on an employee who isn’t performing those duties to avoid paying overtime. The exempt categories include:

  • Executive: Managing and overseeing two or more full-time employees.
  • Administrative: Office work or other support functions such as IT, HR, or finance.
  • Professional: Doctors, accountants, attorneys, and other creative professionals who work independently and use advanced knowledge in their work.
  • Computer professional: Designing, creating, or modifying computer hardware or software, or providing consultation services on appropriate computer hardware or software.
  • Outside sales: Selling products or services at the customer’s home or business.

Another exemption exists for highly compensated employees: these employees must regularly perform at least one of the duties of executive, administrative, or professional employees, and must be paid at least $107,432 annually. You can get more information about these exempt categories on this DOL Factsheet.

Firm owners who employ staff who perform executive, administrative, or professional work will need to ensure that pay rates are high enough to keep them in the exempt category, or will need to track employees’ time and pay overtime for hours over 40 per week.

Minimum wage increases across the country

As of Jan. 1, 2020, minimum wage increased in 21 states. For example, California’s minimum wage moved from $12 to $13. Even here in New Mexico, minimum wage increased from $7.50 to $9. In several states, including California, Illinois, and New York, the current increases are step increases to eventually reach $15 per hour.

However, with a tight job market across most of the country, employers may need to increase wages for all employees, not just those at the bottom of the pay scale.

Tighter rules on independent contractors vs. employees

A new law in California, Assembly Bill 5, codifies a three-prong test that’s used in some form in about half the states to classify workers as employees or independent contractors. Supporters of the bill point to practices in the growing gig economy that may result in exploitation of workers. Under AB 5, workers must pass all three criteria of the ABC test to be treated as contractors:

A. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

B. The worker performs work that is outside the usual course of the hiring entity’s business.

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

This ABC test narrows the definition of workers that can be considered contractors. As any employer who hires both W2 employees and independent contractors knows, employees tend to cost more than independent contractors. Besides the additional cost of payroll taxes, there are benefits to cover.

Firm owners who hire temp workers as contractors during busy season should be aware that although there is an exemption in the law for accountants, this exemption only applies to accountants licensed in the state of California.

Keeping up with changes to employment law, and helping to ensure your clients don’t run afoul of labor laws, is one way to demonstrate your expertise as a trusted advisor.

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