Preparing Your Small Business for the New Overtime Rules

Two months ago, the U.S. Department of Labor (DOL) announced its final adjustments to the overtime exemptions included under the Fair Labor Standards Act. The new overtime rules almost double the salary threshold needed to qualify for overtime exemption to $913 per week or $47,476 per year, up from $455 per week or $23,660 per year.

What this means is that any salaried workers who are earning less than $47,476 a year will be entitled to over-time pay if they work more than 40 hours in a given week. Since the new rule goes into effect December 1, 2016, a mere 5 months from now, small businesses are encouraged to act quickly in order to figure out which employees will be affected and then decide how they will handle the change.

NFIB estimates the new overtime rule will impact 44% of small businesses, while the DOL has announced it could affect over 10 million employees.

How Does the New Overtime Rule Affect Small Businesses?

Aside from the short deadline and significant increase in the threshold, two additional features of the rule will make compliance difficult for many of the nation’s smallest businesses. For one, unlike a raise in the minimum wage, which has a phase-in period, the new overtime rule takes full effect come December 1st. This means that small businesses will be left scrambling to the adjust to the changes in an extremely short amount of time. Another challenge is that the new threshold is expected to be the same across the country, with no adjustments for local conditions. This can put added pressure on businesses operating in regions with a lower median income, such as the state of South Dakota, since a larger portion of their salaried employees will likely be below the threshold.

In order for small businesses to avoid the costly overtime pay or significantly increasing employee salaries above the threshold, the rule could force many owners to move some of their salaried employees into hourly positions. This move, however, has several negative ramifications. First off, some salaried managers and supervisors are expected to work when needed in exchange for flexible hours and other benefits, such as bonuses and health care. It would also effectively take away many promotion opportunities, giving lower level workers less hope for upward movement in the company. Finally, employees moved from their salaried positions to hourly jobs will now also need to keep close track of their time and be prohibited from working overtime. This can make things difficult for businesses that depend on their salaried workers to help when help is needed, and a it could be a big blow in general to worker morale.

The Obama administration estimates that the new rule may cost employers about $255 million per year, however, the National Retail Federation estimates that the cost will actually be as much as $874 million.

What You Can Do in Your Business to Prepare for the New Overtime Rule

Learn all the details of the new overtime rule. The first thing you need to do is head over to the DOL website and read everything that there is regarding the change in overtime. Only when you are clear about the changes can you then start figuring out how best to respond.

Determine which of your employees will be affected by the new rule. Pay particular attention to those who earn just above the threshold, yet they regularly work more than 40 hours a week.

Determine the financial impact. Consider what your business’ expenses would be under the new rule if you didn’t make any changes. Getting an idea of how the new rule impacts your business financially, and most importantly where those expenses are coming from, will help you to choose the best course of action going forward.

Play out a few scenarios. Consider the pattern of overtime payments you have made over the past 2 to 3 years and determine if and by how much your labor costs will increase. For positions that often result in overtime pay, you may have a few different options. You could move salaried positions to hourly ones and then be more strict with the hours worked. Alternatively, you could hire more hourly full-time, part-time, or seasonal employees to fill in the work gap, or you could restructure some of the jobs in you business to help spread the workload around.

What ever strategy you end up choosing, the new overtime rule is around the corner, and you cannot afford to ignore it.