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Employers in Alabama (along with the rest of the country) have faced headaches the last several years with staffing shortages and shift coverage. In June, with bipartisan support, the Alabama Legislature passed House Bill 217 — a first-in-the-nation bill to incentivize hourly employees to work overtime. Beginning January 1, 2024, overtime pay will be exempt from the 5% Alabama income tax. The bill places no cap on how much overtime pay will be eligible for the exemption, but the governor added an executive amendment requiring employers to report to the Alabama Department of Revenue by January 31, 2024, the aggregate amount of OT paid during 2023 along with the number of full-time, hourly employees who received overtime pay. The Alabama Department of Revenue is now drafting a form for that purpose. The same reporting obligation will apply to the 2024 calendar year, but by that time it will be tied to the employer’s normal tax reporting of wage withholdings.

The bill is intended to entice employees to work overtime shifts, as they will be able to pocket more of their income from overtime pay than in the past. The tax cut has an odd expiration date, but it gives the Legislature time during the Spring 2025 regular session to extend and perhaps tweak the exemption if they so choose. The bill’s authors believe political pressure in an election cycle will prompt legislators to extend the tax cut. 

So, what should employers do now? First, call your payroll department (or vendor). You will need them to track overtime paid thus far in 2023 and to how many employees, and to start tracking this in real time for the remainder of this calendar year. Employees won’t get the tax cut for any hours worked in 2023, but you will still be required to report that information to the Alabama Department of Revenue on the forthcoming form. Then, beginning in 2024, payroll will need to adjust employee paychecks to eliminate income tax withholding for all overtime pay issued. 

 Stay tuned to see how this plays out in Alabama and whether other states follow suit. 

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Photo of Anne Knox Averitt Anne Knox Averitt

Anne Knox Averitt is a labor and employment and litigation partner in the Birmingham office. She represents governmental and corporate clients in a number of industries, including automotive, natural resources, manufacturing, health care, non-profit, employee staffing, housing compliance, communications, federal contracting, construction, and…

Anne Knox Averitt is a labor and employment and litigation partner in the Birmingham office. She represents governmental and corporate clients in a number of industries, including automotive, natural resources, manufacturing, health care, non-profit, employee staffing, housing compliance, communications, federal contracting, construction, and financial services. She has helped to obtain favorable resolution for matters at all stages, from dismissal on the initial pleadings to a defense jury verdict.

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Photo of Bruce P. Ely Bruce P. Ely

Bruce Ely’s more than 35 years of experience have allowed him to handle projects as diverse as serving on the recruiting teams that successfully induced both Mercedes-Benz and Hyundai to locate their first U.S. manufacturing plants in Alabama to representing taxpayers before the…

Bruce Ely’s more than 35 years of experience have allowed him to handle projects as diverse as serving on the recruiting teams that successfully induced both Mercedes-Benz and Hyundai to locate their first U.S. manufacturing plants in Alabama to representing taxpayers before the Internal Revenue Service, the Alabama Department of Revenue and local taxing authorities. His practice focuses on three concentric areas: representing taxpayers in federal, state and local administrative and judicial forums; advising companies on choosing the proper form of entity through which to conduct business in the southeast and potential tax incentives; and advising companies and various trade and professional organizations regarding state and local tax legislative matters. He also devotes a substantial amount of time to teaching and writing on SALT-related topics.

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Photo of Anne R. Yuengert Anne R. Yuengert

Anne Yuengert works with clients to manage their employees, including conducting workplace investigations of harassment or theft, training employees and supervisors, consulting on reductions in force and severance agreements, drafting employment agreements (including enforceable noncompetes) and handbooks, assessing reasonable accommodations for disabilities, and…

Anne Yuengert works with clients to manage their employees, including conducting workplace investigations of harassment or theft, training employees and supervisors, consulting on reductions in force and severance agreements, drafting employment agreements (including enforceable noncompetes) and handbooks, assessing reasonable accommodations for disabilities, and working through issues surrounding FMLA and USERRA leave. When preventive measures are not enough, she handles EEOC charges, OFCCP and DOL complaints and investigations, and has handled cases before arbitrators, administrative law judges and federal and state court judges. She has tried more than 30 cases to verdict.

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