What The Overtime Pay Reform Means for Small Businesses

On May 19, 2016, the Obama administration, along with the Department of Labor, finalized details regarding the new overtime pay reform bill. This reform has been in the making since 2014 when President Obama signed an executive order requiring the Department to overhaul current overtime pay laws.

This new rule will be active and enforceable as of December 1, 2016. Once this rule takes effect, a projected 4.2 million additional American workers will be eligible for overtime.

To understand how this may affect your small business, it’s worth exploring the history of our country’s labor and overtime laws, as well as what changes this reform with bring.

A Brief History of US Labor Law

During the height of the Great Depression, employers treated their workers poorly, thus ushering in the passage of the Fair Labor and Standards Act (FLSA) of 1938 that:

• Established a maximum number of hours in a regular workweek (in 1938, it was 44 hours; today, it is 40)
• Created an eight-hour workday
• Required time-and-a-half overtime pay
• Created a national minimum wage (in 1938, it was 25 cents per hour; today, it is $7.25)
• Limited child labor

Providing the impetus for the FLSA was the desire to prevent employees from being exploited. However, due to business flexibility necessities, the FLSA created exempt and non-exempt status for certain employees.

Salaried administrative, professional, and executive employees—along with many technology and outside sales employees—are exempt from overtime requirements, largely due to their already quite high salaries. Thus, whereas these exempt employees are not entitled to overtime pay, they must meet certain criteria regarding their responsibilities and wages.

Conversely, non-exempt employees are covered by FLSA and must be paid at least minimum wage and receive overtime pay at the rate of one-and-a-half times their regular pay for working over 40 hours in any given week.

Whereas FLSA overtime rules protected nearly 62 percent of full-time employees in 1975, this number dwindled to a measly eight percent over the years. The largest offenders were employers who reclassified some employees as “managers” and “supervisors” in lower paying retail and fast food jobs. These employees regularly worked over 40 hours per week without receiving additional pay.

An Overview of the New Rules

First, the wage threshold will be officially set at $47,476. This means that any salaried, hourly, lower-wage, and non-managerial employee who earns less than this amount must receive one-and-a-half times his/her regular wage for any hours in excess of 40, worked in one week. Before this rule went into effect, the threshold amount was only $23,360 per year. This reform will affect nearly 4.2 million American workers who will qualify for overtime.

Every three years, this wage threshold will undergo adjustment to maintain the US’s effective coverage rate at 40 percent. Preliminary projections suggest the threshold will increase to $51,000 at its first adjustment on January 1, 2020. Reasons for this adjustment are to ensure ongoing attention regarding inflation and to prevent another significant gap between reforms.

Finally, employers’ use of commissions and non-discretionary bonuses may comprise only up to ten percent of an employee’s salary level.

How This Rule Affects Small Businesses

As mentioned, this reform will increase the percentage of employees affected by overtime laws from eight percent to 40 percent, thus requiring all businesses to pay their employees based on their overtime hours. This additional cost is estimated at roughly $2,400 per year per employee.

A recent USA Today article lists compliance options for small businesses. Among them are:

• Increasing salaries to the new minimum threshold
• Maintaining salaries while reducing or eliminating overtime
• Maintaining salaries and paying overtime
• Lowering salaries and paying overtime (not recommended)
• Hiring more employees to offset overtime, which eliminates overtime and creates additional jobs

Experts assert that ensuring quality employees are kept, that morale is high, and that the business can handle the extra costs are the three most important factors to consider.

Critics, such as Dan Bosch of the National Federation of Independent Business, argue that this new mandate is just one in a long line of many which disproportionately affect small businesses that include:

• A possible minimum wage increase
• Rising health care costs
• Increased government regulations

For more information, or to discuss how this new mandate may affect your business, please contact us.