Do Not Wait to Review These Payroll Changes

by Karin M. Smith, MBA, SFO, CFE, Consulting Partner

Posted on November 6, 2019

Now that the ghosts and goblins are gone, it is time to plan ahead to the new calendar year.  January will bring about a number of payroll-related changes that entities need to anticipate. It is important for entities to review these changes now, and plan accordingly for the changes that go into effect on January 1, 2020.

Minimum Wage

As most know, the Arizona Minimum Wage will continue to increase each year on January 1.  The current statewide minimum wage will increase to $12 effective January 1, 2020 .  Starting with January 1, 2021, the minimum wage will continue to increase each January, based on the cost of living (CPI) index each year.  This year, the CPI was 2%.  This is a good time of year to review the current hourly rate for all non-exempt positions to plan for the immediate future of 2020 and long term for the necessary budget planning.  The jump from $11 to $12 may have a significant impact on budget planning for some organizations.

Fair Labor Standards Act Wages

Over the past few years, there has been much discussion on the possible changes to the methodology used to determine the “white collar” exemption, classified as exempt vs nonexempt under the Fair Labor Standards Act.  If these discussions slipped by you, below is a brief recap to catch you up.

  • In March 2014, then President Obama issued a Presidential Memorandum to the US Department of Labor instructing the Wage and Hour Division to update the current salary level used in the three-part test used to determine an employee’s exemption status. The salary level test has been set at $455 per week since 2004.
  • In July 2015, the Wage and Hour Division issued a notice of the proposed rule-making to increase the salary level test with the estimated threshold at almost $1,000 per week, reaching an annual pay amount of $50,440.  This notice provided an opportunity for employers and employees to comment on the potential advantages and challenges if this amount was to be used as the new salary amount test.
  • In May 2016, the Wage and Hour Division published the final rule with an effective date of December 1, 2016.  Beginning December 1, 2016, any employee who earns $913 per week or less ($47,476 per year) would not meet the salary level test and would be classified as non-exempt thus being eligible for the overtime and minimum wage provisions of FLSA.
  • With the intended effective date being December 1, on November 22, 2016, a federal judge in Texas put the brakes on the published rule, in essence stalling the effective date of the new rule. 
  • Most recently, earlier in March, the FLSA announced an increase to the white collar salary-level threshold from $23,660 to $35,568.  What this means is that any employee who is paid less than $35,308 or $684 a week (40 hours) will be considered non-exempt.  This will not impact teacher exceptions as they are under a different exemption.  This change goes into effect January 1, 2020.

To be exempt from overtime under the federal Fair Labor Standards Act, employees must be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less, they must be paid one and one-half times their regular hourly rate for hours worked in excess of 40 in a workweek.

The new rule will raise the salary threshold to $684 per week ($35,568 annualized) from $455 per week ($23,660 annualized).  The new rule is expected to prompt employers to reclassify currently exempt workers to nonexempt status and raise pay for others above the new threshold.

W-4 Updates

You may recall that when the Tax Cuts and Jobs Act was signed in December 2017, personal and dependent exemptions were suspended through 2025.  This tax bill also significantly altered how itemized deductions are claimed on personal tax returns.  As a result, the W-4 form is being revised.  The original revision was postponed in 2019 but is now expected to go into effect in 2020.  The changes to the W-4 form include the elimination of withholding allowances and updates the employee filing status.

It is important for employers to know that employees are not required to fill out new W-4s. If they do not, their previous allowance entries will continue to serve as a valid basis for withholding. Not filling out a new W-4 cannot be treated, for payroll and tax purposes, as having failed to complete a W-4. However, new hires from January 1, 2020, as well as anyone wishing to adjust their withholding after that date must use the new form.  Employers should monitor the IRS website for the updated 2020 W-4 form to be released. 

Employee pay is a critical process to ensure is done accurately.  Additionally, payroll expenses typically encompass 75%-80% of an entity’s operating budget.  Planning ahead for these important changes will help ensure your entity is ready beginning January 1, 2020…it will be here sooner than we think!