Before you get completely irate about the new overtime rules released by the Obama administration, consider this: In 1975, 62 percent of salaried workers were eligible for overtime. It's been 12 years since the rules have been updated, and now, only seven percent of salaried workers are overtime eligible. The new rules from the Obama Administration, which take effect December 1, will boost that number to 35 percent of the workers classified as "EAP"--executive, administrative  and professional employees.

Before, business owners didn't have to pay overtime for EAP employees who made more than $23,660 a year. That threshold will rise to $47,500.

When something goes neglected for so long, it's hard to look at changes as mere updates. That's certainly true in this case, where  4.2 million additional workers will now be eligible for overtime. According to the Department of Labor, the revision also "strengthens existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers."  Ouch, says Jack Mozloom, a spokesperson for the National Federation of Independent Business: "It's a big jump all at once. It's going to result in additional expenses and more headaches for small business owners."

The hospitality and restaurant industries are expected to be among the hardest hit. But the rules apply to pretty much everyone -- the business just has to have $500,000 in revenues, or the employees have to be involved in interstate commerce. That standard is "easily met," says Marc Zimmerman, a partner in the New York-based law firm of Phillips Nizer, even if it's just because an employee regularly sends mail out-of-state. Any business owner who employs lower-earning employees in administrative or management positions is likely to be affected, he says. "The fashion industry comes to my mind."

Vice-president Joe Biden, speaking about the new rules at Jeni's Splendid Ice Creams in Columbus, Ohio, described them as a boon to fairness and as good for the economy overall. "If you're working 60 or 70 hours a week and not getting compensated, you're losing the opportunity to improve yourself or spend time with your kid," he said, pointing out that for a family of four, the old cut-off was still below the federal poverty line. Biden predicted that the change would pump $12 billion into the economy over the next ten years, as these workers are likely to spend almost all of it.

Jeni's was chosen for the event, said Biden, partly because he'd enjoyed Jeni's ice cream so much at a campaign stop four years ago, and partly because of Jeni Britton Bauer's philosophy in paying her employees. It wasn't clear, from the Vice-President's comments, if Britton Bauer had been paying overtime to her store managers, who in many retail businesses don't get overtime, or if she simply paid them more. (Jeni's is a certified B Corporation, which typically pays above average wages. Britton Bauer wasn't immediately available for comment.) But the Vice-President was clearly impressed. "I love you kiddo, I mean it," he said. "You did this before the rule."

A Limited Menu

Business owners who are affected by the law have a few choices:

  • Convert staff who earn salaries of between $23,660 and $47,500 to hourly employees, and pay them overtime when they go beyond 40 hours.
     
  • Raise the wages of some employees so that they make more than $47,500, and therefore aren't eligible for overtime
     
  • Limit the hours of employees earning less than $47,500, so that those employees don't work overtime hours, and hire additional employees if needed

For some business owners, the changes are more of a warning than a call to action. Karin Williams is the CEO of Spring, Texas-based RioTel, a 20-person engineering and software firm that works with telecom companies. Her company doesn't currently have any salaried employees making less than the cut-off, but she says the rule effectively sets a floor for the salary level of new employees. "These changes have nothing to do with the actual market rate or job description," she says. "It's another example of government overreach."

Sania Jamil owns a private Pre-k and nursery school called Kids R Kids in Katy, Texas, with about 50 employees. She says some of them are on call to work "as needed," which sometimes translated to more than 40 hours a week. Previously, Jamil didn't have to track those hours precisely. Now, she'll have to watch closely, and decide whether the school can work properly without those additional hours, or whether she'll have to hire another person to take up the slack. "We'll see what gaps exist once the rules goes into effect, and we'll hire more staff if necessary or find more ways to be efficient," she says.

For better or worse, business owners probably won't be facing a big shock like this again. The level at which employees become ineligible for overtime is going to be reset every three years, using the income of a full-time employee at the 40th percentile in the lowest-wage part of the country as a guide. Until then, business owners have until Dec. 1 to get in line with the new rules.

Published on: May 19, 2016