Federal overtime rules which took effect Jan. 1 are having a big impact on Alabama’s small businesses.
The change means more management-level employees are eligible for overtime. According to the Labor Department, the new rule affects an estimated 1.2 million workers nationwide.
Previously, employees classified as managers who earn less than $23,660 annually must be paid time-and-a-half for the number of hours worked beyond 40 in a week.
The new rule increases to $35,568 the salary threshold necessary to exempt executive, administrative, or professional employees from the minimum wage and overtime pay requirements.
These “exempt” employees earn the same amount, whether they put in 40 hours a week or more (or less). Other workers get an hourly wage. The longer they work, the more they earn.
The nearly $12,000 increase in the threshold will increase compensation costs for some small business owners, including those who can’t afford to raise prices, but it could have been worse.
In 2016, my association, NFIB, sued the Obama administration to block raising the threshold to $47,476 — a $23,816 increase that would have affected even more small businesses.
The Trump administration’s overtime rule is better than what Obama proposed. However, it’s still a significant burden for small businesses — especially those in parts of the country where the cost of living isn’t as high and, as a result, salary levels are lower.
That includes states like Alabama.
In practical terms, the change means small businesses can either:
- Raise an employee’s salary to satisfy the new rule. Under this scenario, the employee will remain exempt from overtime pay requirements. For example, if the employee were making $455 per week, the company would have to provide a raise of $229 per week.
- Begin paying hourly wages and overtime rather than paying a higher salary. Under this scenario, the employer must begin tracking hours so that the company can accurately compensate for all time worked, and all overtime due. If the job requires more than 40 hours of work in a week, the company might choose to divide responsibilities among multiple employees to limit overtime liabilities.
Some supporters of the increase argued that being reclassified to non-exempt status will be an advantage. But NFIB members with vast experience running private sector businesses know that limiting an employee’s work hours also limits opportunities for advancement.
Moving from a non-exempt to an exempt position is the first rung on the promotional ladder.
Exempt employees know this, too, and will view the reclassification to non-exempt necessitated by the rule as a demotion. Their morale will suffer as their hours are closely monitored, and they have to decide whether they can afford to leave work to attend a school play.
NFIB hosted a webinar last month to discuss strategies for complying with the new rule. Small business owners can still watch it free at www.nfib.com/webinars/new-overtime-rule-effective-jan-1-what-small-business-needs-to-know/
To avoid legal trouble, every small business should get ahead on overtime compliance now. Meanwhile, lawmakers considering changes must understand that the costs of legislation extend beyond payroll – new rules can have real effects on employee morale.
Rosemary Elebash is NFIB’s state director for Alabama.