October 23, 2014

How the New Overtime Law Changes Will Affect Small Businesses

overtime law

President Obama recently signed an executive order calling for new rules on overtime pay. Currently, salaried workers in executive, administrative and professional positions aren’t eligible for overtime pay if they make over $455 per week. The President suggested $600 or $640 as the new threshold – the current standards for New York and California.

Let’s put this in layman’s terms. There are many arguments for this new overtime law change. According to the White House, only 12% of salaried workers are currently legally required to receive overtime pay, and the threshold hasn’t been raised since the mid-1970’s. Additionally, following the economic downturn, company profits have bounced back, with profits of S&P 500 companies doubling since 2009. However, wages haven’t followed suit.

President Obama said:

“Overtime’s a pretty simple idea — if you have to work more you should get paid more. If you go above and beyond to help your employer and help the economy succeed, then you should share in your success.”

What About Small Businesses and the New Overtime Law?

Unfortunately, these new overtime law changes, if put into effect, will most likely disproportionately affect small businesses. While most large firms can absorb new regulatory costs, small businesses have less revenue to spread the costs across. As Marc Freedman, the Executive Director of Labor Law Policy at the U.S. Chamber of Commerce explained:

“Similar to minimum wage, these changes in overtime rules will fall most harshly on small and medium sized businesses.”

It is predicted that some small companies will see a significant increase in their payroll costs as lower-level employees working 50 or 60 hours a week become eligible for overtime.  In the current economic environment, many small businesses don’t have the available revenue to cover these additional costs. The overtime pay changes could also potentially devastate startups, which often depend on long hours and under-paid dedication from their employees in order to get off the ground.

This new overtime law change will also negatively impact many small business employees. The changes would endanger employee jobs (as many small business owners will be forced to cut back the number of workers they employ) while ignoring the many legitimate reasons why employees may work overtime even without extra pay – like getting experience, developing their skills, or positioning themselves for a promotion.

What Are Your Options?

While a proposed rule is not predicted to come out until the fall, small business owners should start thinking about how they might mitigate these costs now. Some companies may have the revenue to just pay for their newly eligible employees outright, but many small businesses don’t have that luxury. Those already under financial constraints may need to consider raising their prices or reducing their employee numbers.

There are also some other measures small businesses should consider to mitigate these possible regulatory costs. Instead of hiring full-time employees to provide a needed service, small businesses can save money by hiring contract workers or outside service providers. These entities are dictated by contract law rather than employment law, and so are not eligible for overtime or benefits. They can also dictate their own payment terms.

As Paul Christiansen explains in a recent article:

“The corporation is the magic strategy that can open up opportunity, freedom, flexibility and choice for both startups and their service providers.”

Small businesses owners should also consider investing in an automated time-tracking system. If the new overtime law is changed, it will be more important than ever to track how employees are spending their time in order to ensure that no unnecessary overtime hours are logged. A fully integrated system can also show small business owners which employees are profitable to the company, making any budget-induced staff cuts more straightforward.

If the new overtime law changes take effect in the coming year, many small businesses will face additional payroll costs. But with the proper preparations, these costs can be mitigated.

Obama Photo via Shutterstock

7 Comments ▼

Curt Finch


Curt Finch Curt Finch is the CEO of Journyx. Founded in 1996, Journyx automates payroll, billing and cost accounting while easing management of employee time and expenses, and provides confidence that all resources are utilized correctly and completely.

7 Reactions

  1. Note that the first suggestion for dealing with this issue is to hire more contract labor or outside service providers since they’re governed by contract law and wouldn’t be eligible for overtime. So basically, if the government takes this route, SMB owners will adjust to this strategy to avoid additional costs (act in their own best interests), and when the reports come that the law didn’t help much they’ll blame the “greedy” business owners. When will the government wise up?

    • if “contract labor” consisits of 1099 employees that is a slippery slop as the IRS is targeting those relationships with heavy fines. Our experience is that most small business owners don’t understand regs. Outsoursing with a third party is a good stratagy except most are effected
      by DOL and FLSA regs., but would give small firm more flexability and probable cost savings.

    • It’s not going to. That salaried-worker policy is tricky. Just because a person is one of them many places slave that kind of workers by forcing them to work extra without pay. Who said that $600-640/wk is a A-1 salary for a pro? Many blue-collar workers do 2-3 times that much: police officers, firefighters and so. If Obama believe some areas of fixed salary labor should receive OT just because of that title, as noticed by many the small business is going to get hurt. What are they going to do in order to avoid paying OT? Get more employees and reduce the hours per worker, or limit the work to 40 hrs/shift. But at the same time it should wise to pass a law that benefits every fixed-salary employee to work up to 40 hrs/wk and 10% (4 hrs) and no compensation for those hrs when needed. Beyond those 4 hrs. every employee with fixed salary should be paid by the hours he/she works over 44. You can be sure that will bring a sudden stop to places where they ABUSE and SLAVE employees by forcing them to work extra for no extra pay. On the other hand, some small business do the same, so they could be forced to pay their blue-collar employees for every hour they labor, even at the same rate. I know of places where that kind of abuses happens every single week. Finally, if Obama firmly believe (like he once said) that raising the salaries will bring more money to the workers and because of that they will SPEND more, he is dead wrong: what good is a law that raises the salaries when actually the problem is not the salary but the lack of work. Instead of being pushing this kind of fix-up laws he should remember that he promised 2 MILLION JOBS in 2007. Where are they? Bla, bla, bla, and the same after more than 5 unfruitful years of sitting in the White House. Somebody, show me what has he accomplished so far? Promises, promises. If the country is going forward is just because of the kind of people we have, not because of his leadership which is a full disgrace to USA. God bless America because we need His blessings in a hurry.

    • I agree. By outsourcing, companies would most likely cut costs. In fact, it is better to hire online employees instead. Though it may take some time to manage them, it is still good in the long run.

  2. At our small business, salaried compensation comes with a host of benefits including fully paid health insurance upon retirement (yes, you read that right). And since the salaried employees will be converted to an hourly rate that assumes a realistic estimate of overtime pay, the new OT laws will effectively strip benefits from employees with no boost to wages.

    Can you say “unintended consequences”, President Obama?

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