In December 2016, the Department of Labor (DOL) finalized a rule that required business owners to pay overtime to salaried employees making less than $913 per week ($47,476 annually).
Eight months later, a judge in Texas struck it down, before it went into effect, reverting to a 2004 regulation that set the threshold at $455 per week ($23,660 annually).
It appears as though yet another change to overtime laws looms on the horizon.
In March 2019, the DOL proposed a new rule that—if enacted—would entitle salaried employees who earn less than $679 per week ($35,308 annually) to receive overtime compensation beginning in January 2020.
Suffice it to say that the DOL has been eying changes to overtime laws for some time now. Of course, it remains to be seen whether this recently proposed rule gets enacted, a different one is proposed, or the status quo persists. Nobody knows what the future holds.
“Until this rule goes final, it’s still possible that the 2016 rule can come back,” Tammy McCutchen, a former administrator at the DOL, said in a recent interview discussing the DOL’s latest proposal.
Add it all up, and at one point or another, some sort of change seems likely.
It’s just impossible to know with any certainty what that rule might ultimately look like—and when it might go into effect.
How new overtime laws affect small businesses
Assuming the overtime rules do change, what does that mean for small businesses?
1. Cash flow could become a problem
If overtime laws change, businesses might be forced to start cutting bigger checks to previously exempt employees by either paying them overtime or giving them raises to push their pay beyond the threshold. In both cases, cash flow problems may be right around the corner.
What’s more, businesses that are found to violate potential new overtime regulations could be forced to provide back pay to employees who were affected. The DOJ can also add $10,000 fine if they so choose—tightening cash flow that much more.
2. Productivity might take a dip
Unless a business has strong cash reserves, it may be forced to think about scaling employee hours back a little bit to avoid overtime compensation.
Going this route, however, means that less work could get done. A business owner can’t expect their employees to produce at the same clip when they’re working fewer hours, after all.
3. Employee morale could take a hit
To get around a new overtime rule, some businesses might decide to move some of their salaried employees to hourly. When employees are responsible for recording their hours at the end of each shift, it might be easier to make sure that nobody is working more than 40 hours each week (unless a supervisor approves extra time).
Reclassifying employees, however, isn’t just a matter of saying it’s so. You would need to document the process meticulously in order to stay compliant with the Fair Labor Standards Act. Such documentation typically must include when you made the change and why. If you do this, you’ll need to figure out what hourly rates to pay each employee.
Before thinking this is a clever idea, business owners should consider the potential implications.
For example, even if nothing else changes, some employees might view the shift as a demotion of sorts (e.g., “The last time I was paid hourly was in high school!”). If a move from salary to hourly results in a loss of any sort of benefits, employees will almost certainly be unhappy.
In the short term, you might think that changing employee classifications to get around a new overtime regulation might be a smart and easy way to save money. But before heading in this direction, it’s wise to consider the impact such a move might have on turnover.
Now that we’ve looked at three significant ways new overtime laws could potentially affect small businesses, let’s shift our attention to what, specifically, you can do to prepare for any changes before they become law.
How businesses can prepare for new overtime laws
New overtime laws might not be coming tomorrow—or even in January 2020. But, most likely, overtime rules will eventually change. Instead of letting potential changes to these laws adversely affect your business, here are three things you can do to prepare for them ahead of time.
1. Study the proposed new rule
Remember, the current rule being considered is not the same as the one that almost went into effect in 2016. Of course, this means that the 2019 rule may never go into effect either. For all we know, the next change in overtime laws that actually ends up being enacted might not have even seen the light of day quite yet.
Regardless, preparing for any changes in overtime laws starts with understanding what the new law might look like and how it could potentially affect your business.
For starters, you should know the difference between exempt employees (salary) and nonexempt employees (hourly). You also need to know what the proposed salary threshold would be (in the 2019 law’s case, $35,308) and when potential changes would become law if enacted.
Once you know the details of the proposed regulation, you can start developing a plan for how to respond. Even if we see a repeat of 2016 and the proposed regulations don’t get enacted, it’s still time well spent. As Miguel de Cervantes once wrote, being prepared is half the victory.
2. Understand the DOL’s rulemaking process
The DOL can’t just enact a new rule and force businesses to comply overnight. It’s a long process, for good reason. Even if the process is completed, a judge can still overturn the regulation—just as we learned in 2016.
According to SHRM, the DOL’s rulemaking process is as follows:
- The DOL develops a rule
- The DOL sends the rule to the Office of Management and Budget for review
- The DOL published a public Notice of Proposed Rulemaking
- The DOL requests comments from the public
- The DOL responds to public comments
- The DOL sends the final rule to the Office of Management and Budget for review
- The final rule is published in the Federal Register
When you understand how the process works, you can’t be caught off-guard by it—and you’ll know you have plenty of time to prepare in the event laws do change.
3. Prepare now—but wait to make changes
When you read the rules and understand the DOL’s process, you can start thinking about what your business might do in the event the overtime laws do change.
If, for example, you’re perfectly happy with paying your staff more, you may want to look into small business financing options—like a flexible line of credit—that gives you access to funds you need to keep growing your business in the event cash gets tight.
That way, you’ll have the peace of mind that comes with knowing money is always just a few taps of a button away—and that’s only if you need it.
Be sure to keep your employees in the loop, too, so that they aren’t blindsided by potential changes to their compensation, either. Communicate potential changes to them well in advance of them having a real chance of affecting your business.
All this said, you don’t need to actually change anything until any new rules officially go into effect.
As a business owner operating in the United States, you have little control over changes in the overtime laws—should they even occur.
By understanding potential changes to overtime laws and figuring out what your small business can do to accommodate them, you’ll be prepared for whatever comes your way—and, of course, whatever doesn’t, too.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Please consult a tax professional for information about tax laws and how they apply to your business.