Small Businesses: Be Aware—and Beware—of the FLSA Overtime Rule Change and Its Effects

Oct 13, 2016 | Uncategorized

By Amanda Parker, owner and president, Collective Alternative

In July, The Department of Labor published its final rule determining which employees are entitled to overtime pay. The rule’s concept seems simple enough: As of December 1, 2016, any worker who earns less than $47,476 annually—or $913 per week—will be eligible for overtime compensation. But in practice, the rule poses significant challenges for small businesses. 

In addition to the minimum threshold more than doubling, all employees will have to pass a duties test. And in small businesses where employee numbers are lower and each can have a hand in several areas of the workplace, job duties can be tricky to classify, running the risk of misclassifications.

The NFIB estimates the ruling will affect 44 percent of small businesses. And the effects can be devastating. Take mine, for example.

My small marketing firm is lean. We operate lean so we can be affordable for our small business clients. I rely on my employees to meet the demands of a fast-paced environment that runs on deadlines, which means each employee logs some sort of overtime. Depending on the week’s schedule, this can range from one to eight hours per week, per employee. According to the new law, each employee who doesn’t meet the new threshold and job duty requirements will have to be paid time-and-a-half for any overtime worked, which at my company—and the majority of small businesses—is the bulk of my staff. How are we to stay competitive in an industry riddled with quick-turns and price gouging?

With the December 1st deadline on the horizon, NAWBO member Cassandra Faurote of Total Reward Solutions conducted an analysis on my company. Out of the six full-time employees that work on-site, only two are set to meet the new threshold. The other four will not, which left me with a few different options—none of which will drive a positive impact to my bottom line.

Employees Affected and Current Annual Salaries:

            Employee 1: $44,000
            Employee 2 and 3: $35,000
            Employee 4: $26,000

  • Option 1: Raise the salary of each employee who currently falls below the new threshold, and not worry about overtime. Cassandra informed me that each of those employees would need to pass the job description/duties test, which for small businesses whose employees wear many hats, this would be difficult. Even if this were a viable option, it would result in a $42,580 hit to my company’s bottom line.  
  • Option 2: Change the pay structure so that employees who made less than the new threshold would be paid hourly and all overtime would be paid at time-and-a-half. Anticipating we maintain approximately the same amount of overtime we have now, this option would result in a $37,920 hit to my company’s bottom line.
  • Option 3: Cut the salaries of each employee who fell beneath the threshold but still worked more than 40 hours per week, and expect that overtime pay would make up the difference. This option would result in an $8,590 hit to my company’s bottom line. A much more digestible number, but this option means each employee would show less for their annual salary with potential unknown ramifications.

I had three more options that made even less sense to pursue given the size and structure of my firm:

  • Option 4: I could keep salaries the same and not allow any employee to work overtime.
  • Option 5: I could hire another individual to offset all of the overtime currently being collected by my employees.
  • Option 6: I could reduce the salaries more than Option 3 so the net effect is zero.

No matter the option I choose, my company’s bottom line, culture and clients are going to be negatively impacted. But what I found most startling is that many small business owners have absolutely no idea that this is coming. In fact, Faurote estimates that more than 50 percent of small businesses within the Indianapolis area alone are unaware of the potential impact of this rule and have yet to determine their decision for the imminent changes.

Be aware of the new rule and beware of the impact it could have on your business. With just two months left until December 1st, small businesses have no time to waste.

How to respond to the rule change is up to the discretion of each business owner, but the most important aspect to note is that the final decision will significantly affect your dollars, your people and your company’s direction.

Note From NAWBO National:
Please note the U.S. House passed the Regulatory Relief for Small Businesses, Schools, and Nonprofits Act, which postpones from December 1, 2016, until June 1, 2017, the effective date of a final rule of the Department of Labor (81 Fed. Reg. 32552 [May 23, 2016]) revising income thresholds for determining overtime pay for executive, administrative, professional, outside sales and computer (“white collar”) employees exempt from regular minimum wage and overtime pay requirements. The bill still needs to pass the U.S. Senate.

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