Small Businesses and Nonprofits Ill-Equipped to Handle DOL’s Overtime Rule

Today, the Senate Small Business & Entrepreneurship Committee discussed the Department of Labor’s proposed overtime rule’s impact on small businesses and nonprofits. As Politico reported, a final rule may be published as early as next week.

Hopefully, regulators at the DOL take to heart the concerns aired at the hearing. Such a dramatic change—the salary exemption threshold would increase to $50,440 from $23,660, a 113 percent jump—in the amount of overtime eligible employees will hit small business harder than their Big Business counterparts, which have law firms on retainer and numerous human resource officials to crunch the numbers.

However, any changes to soften the blow on small business is unlikely, since the DOL views the rule changes as straightforward and easy to comply with. The DOL predicts that the 7.4 million affected establishments will only need a couple of hours to figure out the rule changes.

Tammy McCutchen, former DOL Wage and Hour administrator, in written testimony, raises issue with DOL’s cavalier attitude towards small business compliance:

In reality, it will take far more than an hour or two – or even ten – to comply with the final rule. Since leaving the Department in 2004, I have assisted dozens and dozens of employers to reclassify employees from exempt to non-exempt. In my experience, reclassifications can take six months or more to achieve and hundreds of hours spent by business leaders, human resources professionals and outside attorneys.

…

Frankly, I am surprised that the Department would encourage any employer to spend so little time ensuring compliance with the FLSA.

Unfortunately, it is likely the DOL will only give employers 60 days to comply with the rule once it is finalized.

In 60 days, a business must inspect its entire workforce and determine how many salaried employees will no longer be exempt from overtime pay. Then an employer must undertake a fact-finding mission to determine how many hours these employees work, which is not easy task since they currently do not need to track these workers’ hours. Once the hours worked by the salaried workforce is established, a cost-benefit analysis is needed to figure out how many employees will receive a raise above the proposed salary threshold, demoted to hourly employees, or paid overtime at their current salary level. These are just a few of the decisions an employer must make to comply with the rule.  

Another issue with the DOL rule is that it is one-size-fits all nature, which does not take into account the vast cost of living differences throughout the country. In McCutchens testimony, she attached a great graphic (p. 6), which is a U.S. map that illustrates the “Percent of Salaried Full-Time Workers Earning Below $970/week.”

The map shows that businesses in low wage states will face greater hardships. In Connecticut, only 27.6 percent of salaried employees earn below the new $50,440 salary threshold. In contrast, in Louisiana, over 50 percent of salaried employees will become eligible for overtime pay. But low wage states like Louisiana also have a lower cost of living. According to PayScale.com, an online salary, benefits, and compensation information company, shows that it costs 23 percent less to live in Baton Rouge, Louisiana, than in Hartford, Connecticut.

Also at the hearing, Nancy Duncan, associate vice president of human resources at the nonprofit Operation Smile, said “the rule will increase the nonprofit’s payroll cost by close to $1 million a year.”

To compensate for the increased cost, Duncan feared that Operational Smile could cut benefits to contain costs.

Other nonprofits have voiced their concerns over the costs of the new overtime rule. Public universities, who face political pressure to keep tuition affordable, fear the added costs will force reductions to student services, cuts to employee benefits, and limits to hours worked in ways that will hinder their educational mission.

Organizations that provide services to the disabled community, primarily funded via Medicaid, face an estimated $1.05 billion in additional costs, according to analysis by health research firm Avalere Health. These workers provide vital services to those in our communities most in need of help. However, without an increase in Medicaid funds, many of these nonprofits will not be able to increase the revenue they will need to deal with the increased labor costs from the new overtime rule.

If small businesses and nonprofits decide the best way to handle the costs of the overtime rule is to reduce benefits, it contradicts the purpose of exempting salaried employees from overtime. Congress made white collar salaried employees exempt from overtime requirements because they were paid well above the minimum wage, received more comprehensive benefits, and had more opportunity for career advancement. All of that is still true today, but may not be the case under the DOL’s rule.

Ultimately, the overtime rule is a poor mechanism to increase wages. All the rule does is add to the already huge regulatory burdens on employers. A better way to increase wages would be to provide regulatory relief to employers, which would free resources to invest in technology or research that increases productivity and would lead to higher wages.