Deadlines to Retroactively Claim Employee Retention Tax Credit Extend to 2024 or 2025
6 min. Read
Businesses can no longer pay wages to claim the Employee Retention Tax Credit, but they have until 2024, and in some instances 2025, to do a look back on their payroll during the pandemic and retroactively claim the credit by filing an amended tax return.
Although the Employee Retention Tax Credit (ERTC) program has officially sunset, this does not impact the ability of a business to claim ERTC retroactively. In fact, businesses can conduct a lookback to determine if wages paid after March 12, 2020 through the end of the program are eligible.
For most businesses, the credit could be claimed on wages until Sept. 30, 2021, with certain businesses having until Dec. 31, 2021 to pay qualified wages.
Businesses have until April 15, 2024, to file amended returns for Q2, Q3, and Q4 of 2020, and until April 15, 2025, to file amended returns for all 2021 quarters.
In addition, several laws have gone into effect since the inception of the ERTC program that impact how the credit can be claimed. Paychex developed an ERTC Service to assist.
This article highlights eligibility, qualified wages, how the credits work and more. It also delineates by law and date because, depending on whether you took a Paycheck Protection Program (PPP) loan and when you claim the credit, there are different requirements.
What is the Employee Retention Credit?
The ERTC is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees.
CARES Act – 2020
For employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020.
Consolidated Appropriations Act – 2021
Employers who qualify, including PPP recipients, can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee per quarter.
American Rescue Plan Act – 2021
The credit remains at 70% of qualified wages up to a $10,000 limit per quarter so a maximum of $7,000 per employee per quarter. So, an employer could claim $7,000 per quarter per employee through the first three quarters of 2021 after the passage of the Infrastructure Investment and Jobs Act changed the end date of the program for most businesses. However, Recovery Startup Businesses (RSBs) were eligible through the end of 2021. They could be eligible to take a credit of up to $50,000 for the third and fourth quarters of 2021.
How Do the Credits Work?
The American Rescue Plan Act stipulates that the nonrefundable pieces of the employee retention tax credit will be claimed against Medicare taxes instead of against Social Security taxes as they were in 2020. However, this change will only apply to wages paid after June 30, 2021 and will not change the total credit amount.
If the credit exceeds the employer’s total liability of the portion of Social Security or Medicare, depending on whether before June 30, 2021 or after in any calendar quarter, the excess is refunded to the employer.
At the end of the quarter, the amounts of these credits will be reconciled on the employer’s Form 941.
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How Does a Business Claim the Employee Retention Tax Credit Retroactively?
The IRS Notice 2021-20 provides guidance for employers claiming the Employee Retention Tax Credit. However, the notice only provides guidance for the credit as it applies to qualified wages paid between March 12, 2020 and Sept. 30, 2021. Additionally, the bulk of the notice reiterates the ERTC FAQs that previously were published on the IRS website.
Included in the notice is guidance on how employers who received a PPP loan can retroactively claim the employee retention tax credit. In order to claim the credit for past quarters, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarter(s) in which the qualified wages were paid. The IRS includes three examples (Q&A No. 57) to highlight the process.
The IRS notice 2021-20 includes seven examples (Q&A No. 49) with scenarios of how an employer with a PPP loan determines which wages, if any, are eligible for the tax credit. The amount of wages eligible largely depends on how the qualified wages were reflected on the PPP loan forgiveness application. Qualified wages included in reported payroll costs on the forgiveness application may be utilized in certain conditions where more expenses than necessary were used to justify the loan forgiveness. In these cases, the IRS will take the minimum wage cost necessary when combined with other eligible expenses to justify loan forgiveness.
However, the IRS makes it clear that expenses eligible for PPP forgiveness that were not included in the loan forgiveness application cannot be factored in after the fact. Consequently, it’s important to ensure all eligible expenses, including non-payroll costs such as utilities, rent and operations expenses, to name a few, are included on PPP loan forgiveness applications in order to maximize the qualified wages available for ERTC.
What Employers Qualify for the Employee Retention Credit?
Most employers, including colleges, universities, hospitals and 501(c) organizations following the enactment of the American Rescue Plan Act, could qualify for the credit. Previously, the Consolidated Appropriations Act expanded qualifications to include businesses who took a loan under the Paycheck Protection Program (PPP), including borrowers from the initial round of PPP who originally were ineligible to claim the tax credit.
Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
- A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
Some businesses, based on IRS guidance, generally do not meet this factor test and would not qualify.
- Those considered essential, unless they have supply of critical material/goods disrupted in manner that affects their ability to continue to operate.
- Businesses shuttered but able to continue their operations largely intact through telework.
However, any of these businesses still may qualify for the credit with the second factor test.
- An employer that has a significant decline in gross receipts.
The IRS released Revenue Procedure 2021-33 in Aug. 2021 that provides a safe harbor under which an employer may exclude the amount of the forgiveness of a PPP loan and the amount of a Shuttered Venue Operators Grant or a Restaurant Revitalization Fund grant from the definition of gross receipts solely for the purpose of determining eligibility to claim the ERTC. Employers must apply the safe harbor consistently across all entities.
CARES Act – 2020
- Generally, if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019, an employer would qualify. They are no longer eligible if in the calendar quarter immediately following the quarter their gross receipts exceed 80% compared to the same calendar quarter in 2019.
Consolidated Appropriations Act, 2021
- In 2021, businesses must be impacted by forced closures or quarantines or have seen more than 20% drop in gross receipts in the quarter compared to the same quarter in 2019.
- If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because you were not yet in business.
American Rescue Plan Act – 2021
- In addition to eligibility requirements under the Consolidated Appropriations Act, 2021, business also have the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter (compared with the corresponding quarter in 2019).
3. Recovery Startup Business
American Rescue Plan Act – 2021
- 3rd and 4th quarter 2021 only — a third category has been added. Those entities that qualify may be entitled to up to $50,000 per quarter.
To qualify as a Recovery Startup Business, one must:
- Have begun carrying on trade or business after Feb. 15, 2020
- Have annual gross receipts that do not exceed $1 million
- Not be eligible for the ERTC under the other two categories, partial/full suspension of operations or decline in gross receipts
The IRS notice 2021-49 clarified that Recovery Startups may use all qualified employee wages for purposes of the credit, regardless of the number of employees. It should also be noted that determining if this category applies is assessed for each quarter. So, if one of the other two categories — gross receipt decline or full/partial suspension — applies to 3rd quarter but not 4th, they would not be a recovery startup in 3rd quarter, yet they may still qualify as a recovery startup in 4th quarter.
The IRS notice is important in understanding how to apply changes to Form 941 necessary to claim the credit. Form 941-X will be used to retroactively file for the applicable quarter(s) in which the qualified wages were paid.
Infrastructure Investment and Jobs Act – 2021
- This law removes a condition of eligibility. Recovery startups are no longer subject to the business closure or gross receipts reduction to qualify. Essentially all RSBs are eligible in 4th quarter.
The Paychex ERTC Service can help businesses determine if they qualify to claim the credit.
What wages qualify when calculating the retention credit?
Wages/compensation, in general, that are subject to FICA taxes, as well as qualified health expenses qualify when calculating the employee retention tax credit. These must have been paid after March 12, 2020 and qualify for the credit if paid through Sept. 30, 2021 (Recovery Startup Businesses had until Dec. 31, 2021).
Remember, the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP.
When determining the qualified health expenses, the IRS has multiple ways of calculating depending on circumstances. Generally, they include the employer and employee pretax portion and not any after-tax amounts.
When determining the qualified wages that can be included, an employer must first determine the number of full-time employees.
For the purposes of the employee retention credit, a full-time employee is defined as one that in any calendar month in 2019 worked at least 30 hours per week or 130 hours in a month (this is the monthly equivalent of 30 hours per week) and the definition based on the employer shared responsibility provision in the ACA.
Note: The employee calculation of full-time equivalent (FTE) used for the PPP forgiveness report is not calculated the same way as a full-time employee for the employee retention credit. If you are an accounting professional, do not provide your clients with the PPP Forgiveness FTE information. Also, remember that if a client has taken and will be forgiven for a PPP loan, they may now be eligible for the employee retention credit on certain wages.
CARES Act – 2020
Those who have more than 100 full-time employees can only use the qualified wages of employees not providing services because of suspension or decline in business. Furthermore, any wages paid for vacation, sick or other days off based on the employer’s current policy cannot be included in qualified wages for the larger employers. Basically, employers can only use this credit on employees who are not working.
Employers with 100 or fewer full-time employees can use all employee wages — those working, as well as any time paid not being at work with the exception of paid leave provided under the Families First Coronavirus Response Act. Leave under FFCRA included paid sick leave and family leave, which when taken under the provisions of the act offered businesses an opportunity to claim a tax credit.
Consolidated Appropriations Act – 2021
This law increased the employee limit to 500 for determining which wages are applicable for the credit.
American Rescue Plan Act – 2021
This law allowed certain hardest-hit businesses — severely financially distressed employers — to claim the credit against all employees’ qualified wages instead of just those who are not providing services. These hardest hit businesses are defined as employers whose gross receipts in the quarter are less than 10% of what they were in a comparable quarter in 2019 or 2020. This only applies to the third quarter of 2021 for businesses that aren't Recovery Startup Businesses.
The IRS does have guardrails in place to prevent wage increases that would count toward the credit once the employer is eligible for the employee retention tax credit.
Are Tipped Wages Included in Qualified Wages?
IRS notice 2021-49 clarified that tips would be included in qualified wages if these wages were subject to FICA. In general, this mean if tips are over $20 in calendar month for an employee, then all tips (including the first $20) would be included in qualified wages for the purpose of the retention credit. Tips that amount to less than $20 in a month are not subject FICA wages and would not qualify for the retention credit.
Are Owner/Spouse Wages Included in Qualified Wages?
It was well understood from a previous statute and previous IRS guidance that related individuals to a majority owner were not included in qualified wages (see IRS FAQ #59 for specifics). However, the owner and spouse wages were unclear. Related individuals are:
- Child or a descendant of a child
- Brother, sister, stepbrother or stepsister
- Father or mother, or an ancestor of either
- Stepfather or stepmother
- Niece or nephew
- Aunt or uncle
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
Notice 2021-49 clarified that attribution rules must be applied to assess whether the owner or spouse’s wages can be included for the ERTC. Essentially, if they are considered a majority owner, then their wages are not qualified wages for ERTC.
Keep in mind, these rules the IRS clarified apply to all quarters for ERTC. Consequently, if wages were previously miss-categorized as qualified wages for ERTC, then amendments to the 941 would be necessary to correct any inadvertent errors.
What is the Interaction with Other Credits and Funding Sources?
- There is no double-dipping for credits. Employers who take the employee retention credit cannot take credit on those same qualified wages for paid family medical leave.
- If an employee is included for the Work Opportunity Tax Credit, they may not be included for the employee retention credit.
Remember, the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP.
American Rescue Plan Act — 2021
Shuttered Venue Operators Grant (SVOG) or Restaurant Revitalization Fund (RRF) recipients may not treat any payroll costs that they take into account in connection with either program to justify use of the grant as qualified wages for the employer retention tax credit in the third quarter 2021 (Recovery Startups still have the fourth quarter).
Keep in mind, an eligible employer receiving these grants must retain records justifying where the funds were used. The funds must be used for eligible uses no later than March 11, 2023 for RRF while the SVOG dates vary (June 30, 2022 is the latest).
What Businesses Should Know about ERTC Retroactive Termination Guidance?
Notice 2021-65 lists conditions that must be met to avoid a failure to deposit penalty. An employer (not a Recovery Startup Business) who reduced employment tax deposits in anticipation of receiving ERTC in the fourth quarter of 2021 before becoming ineligible due to the program’s early termination must have met deadlines included in the notice.
Employers (not Recovery Startup Business) who requested and received an advanced payment of the ERTC for wages paid in the fourth quarter of 2021 will be required to repay the advances by the due date for the applicable employment tax return that includes the fourth quarter of 2021. The advances resulted from filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. For more information, employers should refer to instructions for the applicable tax form.
Failure to pay penalties could result if repayments are not made according to these specific parameters.
For PEO/CPEO customers who had employment tax deposits reduced, as well as received advance payments by filing Form 7200, they will need to repay these under their PEO/CPEO accounts.
How does a PEO client employer reconcile?
Employers utilizing a Professional Employer Organization (PEO) or Certified Professional Employer Organization (CPEO) do not have an individual 941 filed on their behalf, so it’s important for them to understand how they would reconcile this information and receive the credit. The IRS posted guidance to clarify how it would work.
If an eligible employer uses a PEO or CPEO, the retention credit is reported on the PEO/CPEO aggregate Form 941 and Schedule R.
If employers have questions or need more information, they should work with their accountant and payroll specialist.
This article was previously updated Jan. 19, 2022.
When thinking about creating or updating your HR policies, an HR compliance checklist is a great way to help make sure your bases are covered because there's simply too much at stake. Particularly during year-end, there are many moving parts and critical deadlines your business must meet, otherwise you could face penalties. To help your company stay up-to-date, we've compiled a checklist that identifies some of the most important tasks related to payroll, HR compliance, benefits, and other important HR matters.
What Is an HR Compliance Checklist?
HR compliance is a critical part of business success, but this is a complex area with many moving parts. And with the number of employment laws and regulations on the rise, paired with the risk of penalties for non-compliance, it's important to stay organized with HR compliance matters. That's where an HR compliance checklist comes into play. This resource functions as a compass for businesses and HR teams, helping to guide them through and point them toward information and key dates, important documents, and best practices related to HR — from benefits, payroll, hiring and recruiting, and much more.
How To Keep Track of Compliance Deadlines
An HR compliance checklist is a great way to stay on top of key due dates related to applicable federal, state, and local laws and regulations. Consider that there are certain compliance matters with specific deadlines you can anticipate and will need to handle every year. A few examples of these predictable compliance deadlines include:
- Filing W-2s: Generally, by Jan. 31, employers must provide Form W-2 to employees so that they can file their federal and state taxes. A copy of each employee's W-2 must also be sent to the Social Security Administration (same deadline).
- Affordable Care Act (ACA) reporting: Applicable large employers must furnish Form 1095-C to applicable employees by March 2, 2023. The deadline for filing paper Forms 1094-C and 1095-C with the IRS is Feb. 28, 2023, or March 31, 2023, if filing electronically.
- EEO-1 reporting: Certain employers must report demographic workforce data, including data by race/ethnicity, sex and job categories. The next annual collection of data is tentatively scheduled to open in April 2023, per the EEOC.
Other deadlines may be more unpredictable or triggered by certain events, such as when you bring on a new hire or an employee leaves the organization. In such cases, knowing what's required and what your window of time is to meet your responsibilities is the best way to prepare. Regardless of the type of deadline, an HR checklist is an effective way to have visibility into your business's HR compliance-related tasks.
Taxes and Payroll Compliance
When completing taxes and payroll for year-end, reference the payroll and tax compliance checklist below to reduce the risk of mistakes during year-end:
Verify Employee Information
- Validate employee addresses. Incorrect information could delay receipt of W-2 forms for some workers and create waste for your business with the printing and mailing.
- Check your records for employees who left the company during the year to make sure their employment status was correctly updated.
- Verify all Social Security numbers or federal employer identification numbers (FEIN). Missing or incorrect numbers could result in a penalty by the Internal Revenue Service (IRS) of up to $50 for each W-2 returned.
- Include any taxable cash or non-cash benefits (e.g., use of a company car) on the W-2.
- If your business doesn't already do so, consider establishing a secure online portal for employees to obtain their check stubs and W-2s. This may help minimize labor and paper waste, and increase security of sensitive information.
Prepare Year-End Documents Required for Tax Filings
- CARES Act Employee Retention Credit: This tax credit was created to support employers who paid their staff throughout the pandemic. If your business didn't claim the credit last year, you may still be able to claim it. Businesses have three years after the program ends to look back at wages paid after March 12, 2020, to determine eligibility. For qualified wages paid from March 13, 2020 through Dec. 31, 2020, a credit of up to 50 percent of $10,000 in wages, annually, that were paid by companies affected by COVID-19 is available. For qualified wages paid from Jan. 1, 2021 through Sep. 30, 2021, a credit of up to 70 percent of $10,000 in wages, per quarter, paid by companies affected by COVID-19 is available.
- FICA and FUTA forms: Make a note of filing deadlines and various tax responsibilities. For example, per the IRS, if your FUTA tax liability is more than $500 for the calendar year, you must deposit at least one quarterly payment. If your liability is $500 or less in a quarter, carry it forward to the next quarter.
- Affordable Care Act requirements: Companies that must comply with the ACA must prepare and distribute 1095-C forms to applicable employees.
- Independent contractor payments: In addition to preparing employee tax forms, make sure that qualifying independent contractors, who earn more than $600 in a calendar year, receive their correct statements for tax purposes. You must now report these amounts using form 1099-NEC.
Employee Benefits Review
Open enrollment will be here before you know it. Ensure you're prepared to refresh your benefits packages and complete the following tasks related to benefits compliance.
Review Coverage Plans and Health Insurance Policies
- Group health plan renewal: Many group health insurance policies renew on Dec. 1 or Jan. 1. Review coverage plans and pricing to determine if changes are needed.
- ACA requirements: Review the provisions of the Affordable Care Act for ongoing compliance, including:
- Employer Shared Responsibility (ESR) provision under which companies employing an average of 50 or more full-time employees, including full-time equivalents, during the prior year must offer affordable and adequate medical coverage to full-time employees and their dependents or risk a potential assessment.
- IRS 2022 Employer Health Plan Affordability Threshold change: The tax year 2022 health plan affordability threshold, which is set by the IRS and used to determine if an employer's lowest-premium health plan meets the ACA affordability requirement, is 9.61% of an employee's household income (the tax year 2023 limit will be 9.12 percent).
- Open enrollment: Prepare communications with employees and schedule informational meetings.
- FSAs: If you plan to establish a flexible spending account, allowing employees to set aside pre-tax money for medical or dependent care expenses, your business needs to set up the plan and employees need to enroll before the new year.
- Review healthcare plan filing requirements and deadlines.
Gather Payroll Records
Gather payroll records if your workers' compensation policy mirrors the calendar year. An auditor may want to review payroll records in accordance with its policy period.
Compensation Policy Review
The new year is a great time to review employee compensation to make sure you are competitive with the 2023 hiring market.
Confirm Year-End Bonuses
If your business awards year-end discretionary bonuses, work with your payroll provider to issue the checks, either as a separate line item or in separate checks (additional bonus taxation may apply).
Review Wage and Hour Updates
If your applicable state or local minimum wage rate is increasing as of Jan. 1 or on a different date in 2023, ensure the updated rate is reflected for applicable employees' pay as of the effective date. In addition, review your obligations under applicable state and/or local laws with respect to wage and hour matters. Check out what’s happening in your state.
Review Updates To Wage Base Limits
Resetting wage base limits should also be a part of your year-end business compliance checklist. For the upcoming year, companies should be budgeting for the taxes they may not be paying now if employees have already met wage base limits. Wage base limits start over every Jan. 1, including federal and state unemployment tax, Medicare, Social Security, and state employment taxes. Note the 2022 increase in individual wages up to $147,000 subject to the 6.2 percent Social Security tax, also referred to as the Old Age, Survivors, and Disability Insurance (OASDI) tax.
Staffing and Training Processes
This year brought with it a number of hiring challenges, so ensure employees are trained appropriately and that you are complying with any mandated training moving into the new year.
Create or Update Your 2023 Training Calendar
Start looking ahead to next year. Consider developing a calendar of required training for managers and employees, examples of which include sexual harassment prevention training, hiring practices, workplace safety, and effective management. You may also want to schedule time to update managers and staff on COVID-19 protocols and compliance to ensure continued compliance with OSHA, CDC, and local guidance.
Review Employee Time Off
If you have a self-service portal, remind employees to review their vacation, holiday, sick, and paid-time-off banks, especially if you have a "use-it-or-lose-it" policy (where permitted) or caps on carryover amounts. If your business tracks this for employees, you may wish to notify them about their balances.
Review Your Business Continuity Plan (BCP)
Check your company's severe weather, natural disaster, and health emergency policies, and have a BCP in place in case weather, a natural disaster or health emergency impacts your business operations at year-end and through the first quarter of 2023.
Update Your Employee Handbook
An annual review of your employee handbook should be included in your year-end checklist. All new policy updates should be included in the handbook and communicated to employees. You may also want to review any remote or hybrid work policies that you may have implemented in the past few years.
Start 2023 HR Compliance on the Right Path
Preparing now can help your business run more smoothly at holiday time and beyond. Remember to use resources — including assistance with legislative and regulatory compliance, payroll, human resources, and time and attendance management. It can make preparation much easier.
The U.S. Department of Labor (DOL) announced that a proposed new overtime rule will be released, and now is expected in May 2023. The current Final Rule on Overtime has been in effect since Jan. 1, 2020, and, at the time of its implementation, made 1.3 million American workers newly eligible for overtime.
This article will review some of the topics regarding overtime that businesses should know.
What is Overtime Pay?
Overtime pay is one and one-half times an employee’s regular pay rate for every hour that is worked beyond 40 hours in a workweek. There are exceptions because not everyone is eligible for overtime pay, including exempt employees. There are also different types of overtime (e.g., tipped employees) and rates that can vary between states and cities.
What Businesses Are Required to Pay Overtime?
Any business covered under the Fair Labor Standards Act (FLSA) is required to pay non-exempt employees overtime pay.
A business with two or more employees (Enterprise Coverage) is covered by FLSA if:
- They have annual sales of at least $500,000
- They engage in running a hospital or facility that cares for the sick, aging, and mentally ill; provide education (preschool through institutions of higher learning)
An employee does not have to work for a business with Enterprise Coverage to still be covered under FLSA. There is also Individual Coverage available to protect non-exempt employees if:
- Employee activities include conducting business between states, including sending mail or making phone calls to persons in other states, and handling goods moving into the state or out of the state.
The law, generally, also covers housekeepers, cooks, and other domestic service workers.
Do Small Businesses Have to Pay Overtime?
Some smaller businesses that don’t meet the specifications to be covered by the FLSA still might have obligations under their state’s overtime law, as well as an obligation to pay overtime to a non-exempt employee who is covered under the Individual Coverage rules. Employers should consult legal counsel and their state labor department to understand any additional requirements.
How is an Employee Classified as Non-Exempt or Exempt?
An employee’s eligibility for overtime pay is based on employee classification — exempt and non-exempt.
Non-exempt employees must be paid at least the minimum wage for all hours actually worked and must be paid the appropriate overtime premium when they work more than 40 hours in a workweek. Again, employers should be aware if their state has additional obligations, such as California, which requires employers to pay overtime to an employee who works in excess of eight hours in a workday, as well as for the first eight hours on the seventh consecutive day worked in a workweek.
An exempt employee typically works in a professional, executive, or administrative position and meets the following three requirements: their earning level meets the standard threshold ($684), they are paid on a salaried basis (e.g., salary isn’t reduced based on quality of quantity of employee’s work), and they perform job duties considered exempt.
- Professional exemption: Primary duties involve consistent exercise of discretion and judgment requiring an advanced degree or their work involves invention and originality.
- Executive exemption: Primary duty involves managing or supervising two or more full-time employees or their equivalent with authority to hire and fire or whose recommendations regarding hiring and firing are given particular weight.
- Administrative exemption: Primary duties involve non-manual work that helps in managing the business, requiring the use of discretion and independent judgment.
There are additional exemptions, including for Outside Sales, Computer employees, and Highly Compensated Employees (HCEs). More details on the duties for employees who fall under those exemptions can be found on the DOL Fact Sheet #17.
What Are the Current Federal Overtime Rules?
When the FLSA overtime rule changes went into effect in 2020 they included:
- An increase to $684 per week for the standard salary level, up from the previous level of $455.
- An increase to $107,432 per year for the total annual compensation requirement for “highly compensated employees” (HCE).
- Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.
- Revising the special salary levels for workers in U.S. territories and the motion picture industry
- The special salary level in American Samoa remained at $380 per week, while a special salary level in Puerto Rico, Guam, the U.S. Virgin Islands, and the Northern Mariana Islands was set at $455/week.
- The special base rate threshold for employees in the motion picture industry increased to $1,043/week.
Notably there were no changes to the job duties tests, but the DOL indicated plans to update the standard salary level on a more regular basis.
Can Employers Refuse to Pay Overtime?
No. Employers covered by FLSA are required to pay the applicable overtime premium to non-exempt employees for all hours worked over 40 in a workweek, even if the work resulting in overtime was not authorized.
As an employer, you can implement a policy that prohibits unauthorized overtime, and an employer may discipline, up to and including terminating, an employee who consistently violates company policy. However, if a non-exempt employee does work overtime then they must be paid at the applicable overtime rate.
The risk involved in not paying an employee overtime can be substantial. You could be required to pay back wages, fines, and possibly the employee’s legal fees. According to the DOL, fines can be up to $1,000 per violation, plus, depending on your state’s laws, you might be at risk for additional penalties.
Can an Employee Refuse to Work Overtime?
The simple answer is yes. An employee can refuse to work overtime but must be mindful that in “at-will employment” states, they can typically also be fired for refusing their employer’s request. There are exceptions in some states. For example, California has a one-day rest rule that prohibits an employer from requiring an employee to work more than six consecutive days in a workweek.
How Could Future Changes to Salary Thresholds Impact Employers?
Employers might need to make some decisions that best suit the financial needs of their business if the federal rule on overtime regulations is changed. An employer could transition employees from exempt to non-exempt or increase salaries. However, any change could impact the business in unintended ways. Transitioning employees from exempt to non-exempt status could:
- Increase overtime expenses
- Affect employee morale and/or turnover if such changes are perceived as demotions
- Change benefits (e.g., paid time off tied to compensation levels and employee classifications)
- Impose additional recordkeeping requirements.
Employers might consider a cost control measure such as establishing a Safe Harbor 401(k) plan that can exclude overtime from the definition of compensation. However, excluding overtime can be a risky move because the compensation taken into account under the plan must satisfy nondiscrimination testing requirements.
Employers also could face litigation from employees who have their classification changed if they believe they should have been non-exempt the entire time and are now due backpay for overtime worked.
Let’s say you opt for an increase in the salaries of impacted employees. With salaries going up, there exists the possibility that budgetary constraints might force the business to downsize. Wage compression also could result, where employees who received raises due to an increased salary threshold are earning the same, or similar, pay as employees with more experience, creating dissatisfaction and potential morale issues.
Stay Up to Date on U.S. DOL Overtime Rules
Employers have a great deal to keep track of when running a business. For example, they need to know the details of how employees are classified to determine whether they are non-exempt or exempt from minimum wage and overtime provisions of the FLSA. Employers also need to stay up to date on how potential changes to the federal overtime rules in the future could impact their business. Consider how a payroll service provider such as Paychex could alleviate some of the work and give you time back to grow your business.
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