Many small business owners are concerned about how recent changes to the Fair Labor Standards Act overtime rule will impact their business and ultimately their employees and clients. The Department of Labor issued the new rule in an effort to boost income for salaried workers in the lower end of the middle-income bracket. The rule takes effect December 1, 2016
Essentially, the rule raises the threshold for overtime eligibility from $23,660 to $47,476, annually. This means that any worker making less than the threshold amount will have to be paid at an overtime rate for any hours worked in excess of 40 hours per week. Vice President Joe Biden predicted that these changes will trigger a “virtuous cycle” of spending by middle-income workers which will pump $12 billion into the economy over the next 10 years.
According to the “duties test”, which remains in force under the revised rule, only workers whose positions are “executive, administrative, or professional” in nature, and who have the freedom to use discretion in decision making are eligible for the exemption from overtime pay. These roles often require the flexibility and status of the performance-based salaried pay option.
How will the overtime rule affect business?
Employers, then, face a difficult decision on how to comply with the new overtime rule. The National Federation of Independent Business warns that the new rule will be hardest on businesses in small markets and areas where the cost of living is relatively low. It will become increasingly difficult for small business to promote employees to management positions, which is likely to affect overall employee morale. Many middle managers will undoubtedly be reclassified as hourly employees, and the added cost and time of record keeping will be significant. Moreover, these individuals will likely be limited to a 40-hour work week, and may ultimately realize a loss of income, while new part-time or seasonal employees pick up the extra hours at regular wages or minimum wage.
(This infographic, as well as most published studies on the subject were prepared based on the originally proposed threshold of $50,440 annual income. The final threshold of $47,476 was reached by negotiation before the changes were finalized, and is now set to readjust every three years.)
In order to meet the demands of the law, retailers nationwide will likely raise prices, effectively nullifying any potential benefits to the same middle-income Americans the Department of Labor hopes to help. An Oxford Economics study commissioned by the National Retail Federation concluded that compliance will cost the retail and restaurant industries an additional $745 million in administrative and time-keeping expenses. The same study showed that up to 5% of 2,189,600 affected workers would realize an increase in annual income due to overtime eligibility, however, these workers would also see an equal reduction in bonuses and benefits.
Still, some analysts remain hopeful, saying that it’s too soon to know how the changes will play out in the long run. While middle management may shrink significantly, the goal is to help a class of workers which may actually be over-worked and underpaid. The last time this threshold was adjusted for inflation was in 2004 when it was raised from $13,000 to $23,660 annually.
“Fact Sheet: Final Rule to Update the Regulations Defining and Delimiting the Exemption for Executive, Administrative, and Professional Employees” www.dol.gov, U.S. Department of Labor, May 2016. Web. May 28, 2016.
“How Will New Overtime Rules Affect You?” www.foxbusiness.com, Fox News Network, LLC, May 25, 2016. Web. May 31, 2016.
McConnell, Kitty. “How Will New Overtime Rules Affect Small Business Payrolls?” www.manta.com, Manta Media, Inc., May 18, 2016. Web. May 28, 2016.
“New Overtime Rule Adds Costs to Small Businesses and Hurts Workers” www.nfib.com, National Federation of Independent Business, May 26, 2016. Web. May 28, 2016.
“Rethinking Overtime” nrf.com, National Retail Federation, 2016. Web. May 31, 2016.
Sahadi, Jeanne. “Will Obama’s new overtime rules actually hurt workers?” money.cnn.com, Cable News Network, May 23, 2016. Web. May 28, 2016.