Clocking in: Small Business and Overtime Regulation
What is the New Overtime Regulation?
On December 1, 2016, the Labor Department will officially institute new regulations on overtime eligibility for workers. Announced on May 17, the new rules require business owners to pay salary workers earning up to $47,476 a year time-and-a-half overtime pay when they work more than 40 hours during the week. This new regulation will be updated every three years to adjust for average pay in the United States.
Federal employment law stipulates two different ways for employees to receive overtime pay. First, if the employee is not an executive or a professional with decision-making authority they are eligible. Second, if the salary of an employee is below a certain amount, that employee can receive overtime pay.
Who is Affected?
While the Labor Department calculated that the new law will affect 4.2 million workers, the Economic Policy Institute estimates that this new regulation will affect 12.5 million employees. That is 23% of salaried workers. The institute expects these new rules to affect over one million Texans.
The new overtime rule will apply to any business that is subject to the Fair Labor Standards Act. This includes any business with sales of at least $500,000, or employers involved in interstate commerce. The National Federation of Independent Businesses says that the requirements will affect around 44% of US business with fewer than 500 employees.
History of Overtime Pay Regulations
The 1938 law that began federal minimum wage also started the overtime rule. While the government has raised the overtime pay salary cut-off several times over the years, the current cut-off is at $23,660. Vice President Biden noted that that more than 60 percent of salaried workers qualified for overtime in 1975 based on their salaries, but only 7 percent do today.
Complying with Regulations
To comply with these new regulations, employers will have to track employees work hours, even those of salaried employees. This change can involve costly adjustments as employers may have to buy new systems and spend time on regulatory compliance. Additionally, employers may have to change the way they manage their labor budget. Failure to comply can result in lawsuits or penalties.
Employers will most likely respond in a couple of ways. Some employers will choose to limit their employees’ work hours to avoid paying overtime. Others may hire additional workers and divide up existing jobs. Additionally, employers could raise the pay of employees whose salaries are close to the cutoff to avoid paying overtime work. Or employers could cut salaries of workers with the hope that overtime will make up the difference in income.
Oxford Economics predicted that a “disproportionate number[s] of workers” [that] became eligible for overtime and worked more than 40 hours would see their hourly rates decreased by an equal amount, leaving their total annual earnings unchanged.” On the other hand, the Institute for the Study of Labor, said that base wages would fall somewhat over time, but that the higher overtime payments would more than offset any loss in regular salary levels.
Positive Aspects of the New Regulations
The new regulations could potentially have positive effects on the labor force. Goldman Sachs and the Economic Policy Institute estimate that the new regulations will create about 120,000 jobs.
The main argument, however, it is only right for employees to earn overtime for working over 40 hours. Vice President Biden and other supporters of the change present the idea of fairness as the main positive aspect of the new regulation. The Obama Administration hopes that the rule change will give middle-class families additional income.
Negative Aspects of the New Regulations
Despite the potential for positive effects, the new regulations could bring numerous negative consequences for employers.
The new regulations will immediately require employers to keep track of employee attendance and hours. This tracking will impose implementation and operation expenses, which may be prohibitively high for smaller and less profitable firms. Payroll reclassification for small businesses can also be time consuming and expensive. Business owners must also figure out whether their workers are exempt from the new requirements. Misclassification can result in lawsuits and penalties. And, of course, small businesses may face increased payroll expense.
All of these changes can be costly for small businesses to implement. A study by the National Retail Federation estimated employers could end up having to pay as much as $874 million to update payroll systems, convert salaried employees to hourly wages and track their hours. The potential costs have not gone unnoticed; the National Federation of Independent Businesses filed a petition to delay the implementation of these new rules. Otherwise, the new regulation may drive some small firms out of business.
This new measure could even hurt employees by giving workers less flexibility, hour cuts and decreased morale. Salaried employees often enjoy flexibility in working hours that can allow them a certain amount of freedom. This flexibility is about to become more expensive as employees are required to record every hour of their work. Being a salaried employee, rather than per-hour labor, also has positive psychological benefits. Employee morale may therefore drop. Finally, employees will soon run the risk that their employers will cut their hours to avoid paying overtime.
Jobs may be created by this regulation. However, most of those new jobs could come from cutting a full-time job in half to avoid paying overtime. Coordinating two people to do one person’s job will make America’s workforce less productive.
Room for Improvement
These new regulations disproportionately hurt small businesses. It may be important to respect the rights of workers to earn more money for overtime. However, the government must find a solution to help low-income workers without imposing a burden on small business owners.
A step in the right direction would be to institute this new regulation in phases. The overtime income cutoff change from $23,660 to $47,476 is a huge difference. But unless government offsets these costs, perhaps by lowering taxes on small businesses, this new policy will discriminate against the 28 million small businesses that provide more than 8 million American jobs.