How an Overtime Pay Overhaul May Affect Small Businesses

A new proposal from the Department of Labor aims to increase the amount of Americans who are eligible for overtime pay. Here's what you should know.
August 25, 2015

While summertime has typically been associated with taking it easy, many policy makers are thinking about working overtime—or, more specifically, helping more Americans get paid for working 40+ hours a week.

According to a 2014 Gallup poll, the average full-time employee in their sample of 1,271 worked 47 hours a week, almost an entire extra day at the office. After an executive action issued by President Obama in March 2014, the Department of Labor recently proposed a change to the rules that determine who is eligible for overtime pay. These rules haven't been changed since 1975.

Right now, only full-time, salaried employees who make at least $23,600 ($455 per week) are eligible for overtime pay—time and a half for working over 40 hours a week. The number of people eligible for overtime pay has dropped from 12.6 million in 1979 to 3.5 million today, according to the Economic Policy Institute. The Department is proposing that exempt ceiling be raised to at least $50,440 (or $970 per week).

The Department's proposal also includes language to make it clearer who is an exempt and nonexempt worker. Currently, "executives, administratives, and professionals" (EAPs) are exempt from overtime pay, but the broad definition of those titles can lead to unfair applications. (For example, an entry-level employee who makes $35,000 but works 70 hours a week would see "no prospect of additional pay, simply because her employer deems her a 'professional' who is exempt from overtime regulations," the Economic Policy Institute writes.)

If the proposal goes through, 5 million more Americans (or up to 13.5 million, by the Economic Policy Institute estimates), would be eligible for overtime pay. And the people who would benefit the most are women, minorities and families, according to a report by the Institute for Women's Policy Research

The Effect on Small Businesses

But some business owners aren't pleased with the prospect. "Our research shows that the managers who would supposedly benefit oppose this plan and that few workers would actually see more take-home pay," the National Retail Federation stated in a press release. "There simply isn’t any magic pot of money that lets employers pay more just because the government says so."

"These changes will make an incredible difference for the roughly 30 million hourly workers employed in restaurants and retail environments who often live below living wages and stitch together multiple jobs to pay the bills," says John Waldmann, founder of San Francisco-based Homebase, a cloud-based software company that helps employers manage hourly and freelance employees. "However, these changes will not just affect big corporations; they’ll have a big impact on over 2.5 million local restaurants, retailers and other Main Street businesses. The math is difficult for these small businesses. A typical restaurant spends 25 percent of their sales on labor costs today while making a profit of 7 percent; in other words, even a 25 percent increase in labor costs will put them in the red."

"Making overtime mandatory would remove the most important factor in ensuring that your employees are performing at peak level: incentive," says Brandon Baker, owner and head chef of Loveletter Cakeshop in New York City. "An employee should earn overtime by being willing to go above and beyond to complete a particular set of jobs, and not because he performed so inefficiently during regular hours that he has to compensate by working longer hours."

But it may lead to employers keeping a keener eye on their employees workloads. "The law requiring you to pay OT tends to drive a greater management of the hours employees work who are classified as non-exempt," says David Lewis, president and CEO of HR outsourcing and consulting practice OperationsInc and local job board All County Jobs. "That drives better management of one’s business overall as it forces the owner to pay closer attention to workforce scheduling, balancing and productivity."

"We happily offer our high performing employees overtime, and they deserve every minute of it," Baker says. "It takes a hit off the bottom line in the short term, but the quality of work adds to the bottom line tenfold in the long run. That's how an efficient business operates—not by rewarding inefficiency, or worse, mandating that reward."

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