New OT rules force hard choices on small businesses

The government’s new rules requiring overtime pay for millions of workers have small-business owners facing hard choices.

The regulations being issued by the Labor Department today would double to $913 a week from $455 the threshold under which salaried workers must be paid overtime. In terms of annual pay, the threshold rises to $47,476 from $23,660. The rules take effect Dec. 1.

Many businesses such as restaurants, retailers, landscapers and moving companies will have to transition staffers, many of whom are low-level managers, to hourly pay and limit the number of hours these employees work. That can increase the workload for other staffers, have everyone scrambling to get work done in fewer hours and hurt morale. Some owners say they'll have to limit hiring, cut services or other costs. Others are turning to technology to try to get work done in less time. And some say they'll give staffers a raise to get them out of overtime territory.

Chad Brooks expects to switch managers at his eight franchise restaurants to hourly pay, and plans to send them home as soon as their shifts are over. Other staffers at the Pittsburgh-area Qdoba and Burger 21 franchises will have to pitch in to handle their work. Brooks already foresees problems, for example, if a customer wants to complain to the manager.

“Guests will be extremely frustrated when they ask, ‘where's the manager,’ and a worker says, ‘he’s not here,’” Brooks says.

Brooks has warned his managers that the change is coming. They’re not happy because they’ll work fewer hours and take home less pay. And hourly pay in the restaurant business is seen as entry-level compensation, not the salary that managers get as they move up the ladder.

“Everyone coming to work for you wants to be salaried, have that cachet, that status,” Brooks says.

The new rules, which will be revised every three years, aim to increase pay for an estimated 4.2 million workers, including many who work 45, 50 or more hours in a week without extra pay. Businesses have been on notice about higher overtime costs since last summer, when the government issued proposed regulations. Companies are on the hook not just for time-and-a-half, but also for higher Social Security and Medicare taxes employers must pay on all of a staffer's compensation. The rules don’t cover many employees who are office workers, computer programmers or professionals.

Small businesses lack the large revenue streams and credit lines of bigger companies, so they may struggle to afford the additional overtime costs, particularly those already facing higher minimum wages or increased health care costs.

Some owners will decide that it makes sense to give staffers whose pay is close to the $47,476 threshold a raise rather than face an uncertain overtime bill going forward, said Jonathan Sigel, a labor attorney with the law firm Mirick O’Connell in Worcester, Massachusetts.

Money isn’t the only issue. Managers used to staying at work until a task is done may feel demoralized when forced to leave work unfinished, says Midge Seltzer, president of Engage PEO, a human resources provider based in Hollywood, Florida.

“Most of the workplace consists of conscientious employees. It’s going to be difficult for them to just throw their hands up and say, ‘I'm done,’” she said.

Whether staffers will earn more or less under the regulations depends on the hourly wage each company sets. Many companies who expect to pay more are already looking at their budgets for other expenses that can be reduced or eliminated.

Ben Walker is cutting his marketing budget to come up with the money he’ll need for overtime for the four staffers at his phone call transcription service. Walker, owner of Transcription Outsourcing in Denver, decided not to wait for the regulations; he put his workers on hourly pay last November after asking them what they thought would be a fair wage. The change has resulted in staffers getting higher pay and slightly fewer hours. His payroll costs, which account for half his expenses, have gone up 15 percent.

“I guess I could be angry about it, but it’s the way it goes — and they’re happier,” Walker said. The staffers are team leaders at the company, overseeing freelancers who transcribe phone calls for doctors, lawyers and law enforcement agencies.

Automation is the answer for Deborah Sweeney. She’s investing in customer service software for her online business services company, MyCorporation, because she expects higher overtime costs to limit her ability to hire more staffers. Thirty of the 43 employees at the Calabasas, California-based company will be affected by the new regulations. Software programs will help handle MyCorporation's growing workload.

Startups that expect to hire are now factoring overtime costs into their projected expenses.

Jeff Kerr, owner of Casefleet, an Atlanta company that makes software for law firms, anticipates hiring as many as 15 people in the next two years. The positions, which require less-experienced workers, will likely pay less than the $47,476 threshold.

“We will just have to pay them overtime wages,” Kerr says.