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Proposed regulatory re- lief from paying overtime may sound good for the expense side of the income statement. But hidden costs may be lurking in higher turnover, rankled employees and even an increase in overtime outlays for some businesses.
Under sweeping changes to the federal Fair Labor Standards Act proposed by the Bush administration, middle-income employees who make more than $65,000 per year would no longer be eligible for overtime, while low-income workers with annual wages up to $22,100 would qualify for overtime for the first time. Current law guarantees overtime only for workers making less than $8,060 per year. The proposed rules would also give employers more flexibility to reclassify workers making between $22,000 and $65,000 into professional, administrative or executive categories that are overtime-exempt.
How much entrepreneurs will benefit or suffer under the new rules, which at press time were being strongly challenged in Congress, depends on the business and the type of workers employed. Some companies, like stores and restaurants that employ assistant managers, may end up shelling out thousands more in overtime every year. Those with highly paid white-collar workers may instead save thousands. The impact also depends on geography. Companies in Washington, for example, would see little change due to the state's generous overtime regulations, which exceed the federal proposal.
The biggest challenge would be interpreting rules for reclassifying middle-income workers. "Entrepreneurs will find this difficult to apply," says Ellen Kearns, a partner in the labor and employ-ment law practice group of Epstein Becker & Green PC in Boston. Business owners can try their hand at it, but it's the courts that will likely decide how to interpret the changes. Until then, Kearns suggests preventive damage control, such as requiring arbitration to settle workplace disputes.
Whatever form the new rules take, employers would be wise to approach the issue with caution. "It's a bad idea to yank away someone's overtime without offering additional compensation in return," says David Flotten, administrative manager at CFG Employers Services, a human resources consulting firm in Minneapolis. Employers can soften the blow with comp time for overtime hours, bonus or additional vacation pay or more sick leave. For the best results, he adds, "you should pay employees what they're worth."