Overtime Pay Tax Credit for Oregon Farmers–HB 4002

With the passage of HB 4002 in March of this year, Oregon became the eighth state in the U.S. to mandate overtime pay for agricultural workers. The bill established hourly workweek limits with thresholds for overtime that will phase in over the next five years.  

Because of the seasonal nature of Oregon’s agriculture and limited harvesting timeframes, it may be impossible to avoid employee overtime. Farmers who incur the extra cost of overtime pay should take advantage of a tax credit that allows them to recoup at least some of the cost. The Bureau of Labor and Industries (“BOLI”) should announce rules related to this bill in the coming months.  

Most farmers will be required to pay their employees 150% (or 1.5 times) of their regular hourly rate on all hours worked in excess of 55 hours per week. This will go into effect on January 1, 2023, and the threshold for hours per workweek will ultimately decrease to 40 hours per week permanently, phasing in as follows:  

There are some exemptions that are laid out by the Oregon Farm Bureau. However, employers who violate the overtime pay requirements may owe regular pay, back pay, and civil money penalties.  

Employers can recover all or part of the incremental wage increase for overtime pay through a refundable tax credit against income and corporation excise taxes. This tax credit is capped at $55 million for all taxpayers per calendar year. If applications for the credit exceed this amount, the Department of Revenue will proportionately reduce the amount of certified credits among all applicants. 

A farm employer will have until January 31, 2024 to apply for the credit. The Department of Revenue will review the applications and extend filing deadlines for applicants by June 1 of the following year. The department will issue written notice to taxpayers who meet the application requirements indicating the maximum credit they may claim for the calendar year.  

 How the tax credit will be administered is yet to be determined, but it’s likely that the Oregon Department of Revenue will develop rules by the end of 2022. 

Farm operators with fewer than 25 FTEs benefit the most from the tax credit. Larger operations with 50 or more FTEs receive a credit for about half their overtime pay costs, and the credit phases out in 2029. Labor contractors are not eligible for a credit, but farm employers of contracted workers are eligible with appropriate documentation.   

The tax credit goes into effect as a percentage of overtime wages paid to farm workers:  

Employers may be tempted to set up multiple entities to avoid overtime obligations or to get larger tax credits. However, BOLI will likely use the “common ownership” standard employed by the IRS and the Oregon Department of Revenue to evaluate the relationship between companies – if entities share employees, tools, financials, owners, and other resources, the agency may determine the two companies are actually one company.   

Your number of employees should be calculated based on the Full-Time Equivalent (FTE) and not the headcount or number of actual employees. One FTE is equal to 2,080 hours of work for an employer in a calendar year. But a typical Oregon farm employee can easily work up to 2,750 hours in a year, which adds up to almost 1.5 FTEs.  

Example: An employer with less than 52,000 employee hours in a single year will be within the 25-employee threshold (52,000/2,080 = 25 FTEs).  

However, you may have a headcount of 20 employees and think you’re under the 25 FTE number. But if your 20 employees work 2,750 hours each in a year, that totals 55,000 hours. Divide that by the 2,080 definition of one FTE, and you technically have more than 26 FTEs/employees. 

To further mitigate the cost of farm worker overtime pay, the legislature provided a one-time allocation of $10 million (HB 5202) to establish a grant, loan, or lending program to provide financial assistance to employers. The Oregon Department of Agriculture and the Department of Administrative Services are to draft legislation by September 2022 to create this assistance program.  

If you have questions about the impacts of HB 4002, how to calculate your tax credit or want to explore strategies to increase your tax efficiency, fill out the form below to contact authors and experts, Curtis Sawyer, CPA and Joe Fitts, CPA.  

Our team of agriculture experts can help you determine whether you qualify and what steps your business should take to maximize tax savings. We are here to help guide you through any tax policy changes that may come into effect.