Navigating the New Overtime Pay Exemption Rules in Alabama: What Employers Need to Know

As businesses continue to adapt to evolving labor laws, staying informed about regulatory changes is crucial. Many of my clients still have questions on the Overtime Pay Exemption Law that was adopted by the State of Alabama on 12/15/2023. In this article we analyze the administrative rule in Alabama introduces significant changes to how overtime pay is treated for hourly wage-paid employees. Effective from January 1, 2024, this rule exempts certain overtime payments from gross income for state tax purposes, providing both opportunities and responsibilities for employers.

Understanding the New Overtime Pay Exemption

The new rule, identified as 810-3-72-.02 Overtime Pay Exemption, outlines specific conditions under which overtime pay is exempt from Alabama taxable income. For hourly wage-paid employees, overtime is defined as hours worked in excess of 40 hours in a workweek. Importantly, this exemption applies only to overtime wages paid at the regular rate of pay.

However, it's essential to note that paid time off (PTO) and holiday pay do not count toward the 40 hours of "work" needed to qualify for overtime. For example, if an employee works 16 hours and takes 32 hours of PTO in a week, only the 16 hours are considered for overtime exemption.

Who Benefits from the Exemption?

This rule specifically targets hourly wage-paid employees, excluding salaried employees and those whose compensation includes commissions, bonuses, or alternative payment methods like mileage or comp time. Employers should carefully assess their workforce to determine which employees qualify for this tax benefit.

Reporting Requirements

Compliance with the new rule involves detailed reporting. Employers must include the total amount of exempt overtime wages in their monthly (Form A-6) or quarterly (Form A-1) withholding tax returns starting January 2024. Additionally, these exempt wages must be accurately reflected in Box 14 of the employee’s annual Form W-2.

Conclusion

This new overtime pay exemption rule presents an opportunity for businesses to manage their tax liabilities more effectively. However, it also demands careful attention to compliance and accurate reporting. Employers in Alabama should review their payroll processes to ensure they fully understand and correctly apply these new requirements.

Stay informed and prepared by keeping up with the latest regulatory changes. This proactive approach will ensure your business remains compliant and leverages any available tax benefits.