What does the new overtime law mean for small businesses?

June 29, 2016 - 4 minutes read

This post was originally published in the Grand Rapids Business Journal’s Small Business & Startups blog. View the original post here.

For the first time in 12 years, the U.S. Department of Labor has announced an update to the overtime rule that will greatly impact America’s middle class.

The ruling, officially announced by President Barack Obama and Department of Labor Secretary Thomas Perez on May 18, increases the salary threshold for paid overtime from $455 per week to $913 per week. Formerly, salaried workers were only eligible for paid overtime if they earned an annual salary of $23,660 or less. Under the new ruling, employees with annual salaries of $47,476 will be eligible for paid overtime if they work more than 40 hours in a week.

According to the DOL, the new rules will extend overtime protection to 4.2 million workers in the United States. However, the Economic Policy Institute estimates that the laws will impact up to 12.5 million Americans, many of whom are currently mis-classified as having job duties that preclude receiving overtime.

In the busy world of entrepreneurship it can sometimes be difficult to keep up with the progress of labor laws and regulations. With an implementation date of Dec. 1, this ruling in particular seems to have flown under the radar of many small business owners who are now scrambling to figure out how it affects both their employees and their profitability.

Kathy Miller, a business growth consultant with the Michigan Small Business Development Center, foresees some challenges ahead as small businesses determine how to implement the overtime ruling.

“This change will definitely be difficult for many small businesses in terms of administration, payroll costs, overtime costs, and possible drops in production or customer service,” Miller said.

She said small business owners will have two clear choices and perhaps other less-clear (but more administratively demanding) options:

  • Raise the pay of current exempt employees to the new levels, leaving duties and work hours unchanged.
  • Consider reclassifying current exempt employees to hourly (or salary) non-exempt and then restrict overtime to save money.

To comply with the new ruling, small business owners can either bump employees’ salaries up beyond the $47,476 threshold, pay the mandated time-and-a-half for overtime for work over 40 hours per week, or begin counting the hours employees work — essentially transitioning salaried employees into hourly employees.

The business community has had a mixed response so far. As this ruling comes in on top of Affordable Care Act obligations and state minimum wage increases, many small businesses simply cannot afford to increase salaries. However, transitioning salaried employees to hourly and limiting the flexibility of those hours can seem like a demotion, negatively impacting workplace culture.

Small businesses can begin to prepare for this change by doing a few things:

  • Identify exempt positions where employees earn less than $47,476.
  • Determine which positions should receive a salary increase to be raised above the threshold.
  • For the employees that will be reclassified as non-exempt, analyze what tasks they routinely perform and how many hours they typically work. Determine what responsibilities can be redistributed or eliminated.
  • After converting employees to hourly pay, establish restrictions for overtime work.

A change this big brings both challenges and opportunities to the small business community, and nearly every single person will be impacted. Entrepreneurs interested in learning more about the regulation and how to prepare can sign up for informational webinars offered by the DOL.