How New Federal Overtime Laws Will Affect Small Businesses


Editors Note:  Currently this law is held up in the courts, but it still may come back!

Whether you are an existing business owner or looking to hire to support a new business, new federal overtime rules could significantly impact your payroll. The Labor Department finalized an expansion to the overtime rules that will raise the overtime salary threshold. This means that all employees making less than $47,476 per year will be entitled to overtime pay—that’s time and a half for any hours over 40 per week.

What changed?
Prior to the overtime expansion, the threshold was set at only $23,660, allowing business owners to establish a salary for managers without being forced to pay overtime compensation under the “white collar” exemption. According to the U.S. Department of Labor, the final version of this rule will raise the minimum salary and require overtime pay for an estimated 4.2 million workers who are currently exempt.

Do I need to raise the salary for all of my managers?
Not necessarily. Depending on how many hours your current managers are working you could maintain their salary and make sure that they are not working more than 40 hours per week. This could mean hiring additional workers to cover the time gap or you could simply pay the overtime. Either way, it would be wise to do a cost benefit analysis of your needs and your business operations and determine how to best cover overtime.

Do I need to reduce the hourly expectation for my managers?
Any employees who make less than $47,476 will be entitled to time and a half. Whether you decide to minimize hourly expectation to prevent overtime payments or raise the yearly salary is up to you. The new overtime laws are intended to protect middle-class workers regardless of their titles. The new laws apply to all employees, including managers.

What are the penalties for overtime violations?
The new laws go into effect December 1, 2016 so you should ensure compliance by that date. Employees who are denied overtime can file lawsuits and join class actions against employers who have failed to comply with the law. This could result in steep fines and penalties so it is in the best interests of every employer to adjust payroll and salaries before the new overtime laws go into effect.

Can I simply cut the hours of my employees?
To prevent overtime pay obligations, many employers will shift to part-time and temporary workers to make up the difference. You could also convert your employees to hourly so that you can better track hours worked and ensure that all of your workers stay under the 40 hour per week threshold. There is no law that prevents you from shifting to part-time or a temporary workforce, however you should still be mindful of employee rights, workers’ compensation, and the fine line between independent contractors and employees.

Who will be most impacted by this change in law?
Any business owner offering employees a salary under $47,476 will automatically be forced to pay overtime for those employees. Workers who were paid hourly are already entitled to overtime regardless of their annual earnings. Primarily, the law will impact employers and the millions of lower level and mid-level managers and office staff. The federal overtime law change will have a broad effect on industries nationwide including retail, restaurant and service, universities, non-profits, and the professional business sector.

What are other businesses doing to absorb costs?
If you are a new business owner worried about how the new overtime laws may impact your bottom-line, consider what other businesses are doing to absorb the costs. Some have simply reduced the starting pay for new managers to compensate for the overtime they will need to pay out. For example, if you started out new employees at $40,000 you could lower to $35,000 and expect to pay overtime. Other employees have cut benefits and shifted workers to an hourly rate rather than salary. These options can work against the employee, but many employees have had to make such adjustments to ensure compliance and protect their profit margins.

Do bonuses apply to salary minimum?
Yes. If your employees receive a salary plus a bonus, that bonus can count toward up to 10% of wage. This means that if a combined salary and bonus is more than the minimum $47,476 you do not have to pay overtime.

What activities actually constitute overtime for managers?
Some jobs require afterhours attention, including checking Blackberries or iPhones at home, writing emails on the weekend, or travel time for work. But do these activities constitute overtime under the new law? When the federal overtime law kicks in in December, employers may have to take a second look at such activities and could require that employees be compensated for these after-hours activities. Pay challenges can also creep up when employees are needed to make calls overseas at odd hours or handle other tasks that would normally be covered by a salary.

Do I need an expert to help with my payroll?
Depending on how many employees you have and the extent of your payroll, you could benefit from working with a human resources expert or attorney to ensure compliance with wage and hour law. Any violations could result in serious penalties or consequences. Wage and hour violations may include failure to pay overtime, misclassification, and other discrepancies. Under the Fair Labor Standards Act (FLSA), any employer who violates minimum wage and compensation laws could be liable for both shortfall and liquidated damages.

Government penalties are becoming steeper for employees who flout wage and hour laws. Business owners can also be held personally liable. In a recent case, the president of a Minnesota company was sentenced to two years in jail and a potential fine of $3.3 million for intentionally underpaying overtime and benefits. To avoid fines and criminal penalties employers must comply with all state and federal minimum wage, overtime, and other benefit related regulations. An experienced human resources consultant or employment law attorney could help review your payroll and benefits to help protect your investments and business.


About Author

Kate Leismer

Kate Leismer is a licensed attorney with experience in business and employment law. She has worked for several law firms in the U.S., the ACLU and is a former editor for University of Minnesota's Journal of International Law. She is currently a freelance writer living in Berlin. For more information about her writing, research, and legal experience, please visit