What could be the effects of the Department of Labor’s proposed overtime rule on small business?
Are you paid a salary of less than $50,000?
Do you work more than 40 hours a week?
Are you currently paid for overtime?
While this sounds like an attorney advertisement, it may be coming soon to a TV near you—if the newly proposed Department of Labor (DOL) rules go into affect. Allow me to explain.
Current vs. Proposed Overtime Rule
Currently, an employee that makes a minimum salary of $455/week meets the DOL’s definition of an exempt employee. This exempts he or she from receiving overtime wages. But a recent proposal put forth by President Obama and the DOL sets out to change the qualification to include workers in the 40th percentile. They’re proposing that employees earning up to $921/week also receive overtime wages— inconsiderate of the burden it would heap upon small business owners.
3 Possible Small Business Scenarios
Their argument is that many exempt employees are overworked and underpaid. And while their intentions are noble (we’re all in favor of a raise), the whole thing is a bit short-sighted, in my opinion. Here’s my prediction:
Joe is currently an exempt-level employee that works an average of 50 hours per week. Joe is paid $30,000/year or $576.92/week ($14.42/hour in a 40-hour week), which is a nice amount above the minimum. Joe’s boss, “Evil Small Business Owner,” is now forced to comply with the DOL’s change. But “Evil Small Business Owner” is already trying to figure out how to survive the tax implications and burdens of the Affordable Care Act, as well as the myriad other burdens small businesses have to face. And thus, the company is faced with a dilemma.
“Evil Small Business Owner” can’t afford to pay Joe an extra $216.30 per week to do the same job that he’s been doing (10 hours at $21.63/hour overtime rate). And so, “Evil Small Business Owner” must get creative in order to keep the doors open so that Joe and his co-workers can keep their jobs.
The first option is to take Joe off of salary and simply pay him an hourly wage of $14.42 an hour. Then hire someone less qualified and shift the extra 10 hours of Joe’s work to that person. This ensures the work continues without paying overtime wages. Though this still costs some in additional wages, it saves the employer money compared to the overtime alternative. And Joe likely remains happy because he works 10 less hours for the same pay.
The second option is to factor the original wage into a calculation to see what Joe needs to be paid in order to make the same amount without increasing cost. “Evil Small Business Owner” can now pay Joe $10.50/hour for 50 hours, so that his gross pay is $577.50. In effect, this gives Joe a raise of .58 cents a week! On the surface this sounds fine. But Joe will be taxed at a higher rate for those overtime wages. The end result is a decrease in Joe’s net paycheck, which won’t make him happy. But there is a silver lining! Joe will now qualify for a health insurance subsidy, food stamps, cell phone and maybe even a housing assistance (tongue-in-cheek).
Finally, if “Evil Small Business Owner” truly doesn’t care about Joe, he will fire him and hire two employees to work 25 hours a week. And he’ll pay them each $11.50/hour. This will keep costs the same AND the employer will have one less full-time employee to offer benefits to.
While the above scenarios may not work for many large businesses, I can assure you that, should this rule be put into place, many small businesses (those that employ between 2–100 employees) will be faced with these decisions. It’s yet another example of the Department of Labor not thinking through the repercussions of their rulings. Undoubtedly, there will be much opposition to this rule from many sources. But there’s also no doubt others will push for this to be upheld—especially those already in favor of an increased minimum wage.
In the end, I expect that more companies will look to outsource almost any-and-every feasible position in order to avoid some of these increased expenses. When they do, I hope these companies will consider outsourcing to US-based firms so that we can at least keep the jobs within the US. My fear, however, is that this will lead to many more positions sent outside the US. And that hurts everyone.