The New Overtime Rules: What They Mean to Small Businesses (and to All of Us)

The New Overtime Rules

by Harry Galstian

June 16, 2016

Reports about the new overtime rules have been scattered across news outlets and social media. But what exactly is changing? And how will it affect small business owners (and their employees)? Read on to learn more and to see what you’ll need to do to prepare.

New Overtime Rules in a Nutshell

Beginning December 1 of this year, the overtime threshold for salaried employees will change from $23,660 to $47,476, meaning many exempt status employees will now be classified as nonexempt. In layman’s terms, if you have salaried employees earning under $47k, they may now be eligible for overtime pay if their weekly total hours worked exceeds 40.

Impacts on Small Businesses

The National Federation of Independent Business (NFIB) estimates these changes will affect 44 percent of small businesses, with the Department of Labor estimating a $1.5 billion cost to employers (and that includes roughly $300,000 in related administrative expenses). Many speculate that these changes could also lead to an increase in wage dispute-related lawsuits. In any case, small business owners will need to complete a plan to deal with the new overtime laws as soon as possible.

Effects on Employees

According to the Los Angeles Times, roughly five million workers, or about 40 percent of the country’s salaried employees, will be directly impacted by this status reclassification. While intuitively it may seem that these new rules will equal increased pay for overworked employees, in reality, this will probably not be so.

For small businesses unable to afford overtime pay, many newly nonexempt, salaried workers will be moved to hourly employees. The Fiscal Times believes this may mean a loss of flexibility offered by a salaried position. The fiscal impact to small businesses could also equal a reduction in promotion opportunities for employees and slowed job growth as employers process the changes.

Small Business Options

There are a few things small businesses will need to consider with the coming overtime rules. To start, employers should compile a list of all employees earning below the threshold.

Things to keep in mind:

  • Also called the “white collar” exemption, employees in executive, administrative or professional roles who earn below the threshold will remain exempt. Want to determine who fits within this list? Compile a list of primary responsibilities for each employee.
  • Up to 10 percent of non-discretionary bonuses and commissions can be included when calculating employee salaries. This means that these employees may potentially remain exempt depending on your earnings structure.

Once all of the non-exempt employees are identified, employers will need to consider if a boost in pay or conversion to hourly wages will be the most beneficial. As a note, employees converted from salary to hourly may consider this a demotion, so employers risk a loss in company morale with this option. For the best business protection, employers will also need to implement a way of tracking weekly hours for the office and, more than likely, discourage overtime among non-exempt staff.

The new overtime rules add costs to small businesses and complexity to payroll taxes. If you are a small business and need assistance with tax preparation and bookkeeping, contact our sister company, Connected Tax Solutions.