What Obama's Overtime Reform Means for Small Businesses

Early in 2014, President Obama signed an executive order directing the U.S. Labor Department to reform the current overtime law and system. There have been a lot of conflicting numbers, statistics and conclusions thrown around since then, which can make things confusing. That is why we have put together this guide, to help you know what is going to change, how it is going to affect your small business, and what you can do about it.

What is Actually Changing?

Under the current overtime system, you must pay overtime to any salaried employees that make under $23,360/year. If they make over $23,360 and perform any kind of overseeing or managerial tasks, then you are not required to pay them overtime. Under the new system, the wage threshold would be raised to $50,440/year or $970/week. In other words, you will have to pay any of your employees that make less than that $50,440, 1.5x their hourly rate for any hours they work over 40 in a single week.

How Much Extra Can I Expect to Pay Per Employee in Wage Compensation?

If the overtime reform goes into effect, the percentage of the workforce affected in some way by overtime reform law will jump from the current number of 8% to 40%. Although the extra wages you actually pay to your employees will depend on their overtime hours, by some estimates the average business owner will pay around $2,400 extra a year per employee qualifying for overtime pay.

What Are the Positives and Negatives?


The whole point of the overtime reform is to help employees, especially those that are overworked. The idea is that they will either get paid for the overtime they work or have their overtime hours cut so they have a better quality of life. It's an admirable goal and if it worked out as planned, would be a positive change.


The problem is that nothing the government does ever seems to go quite as planned. In this case, there are a lot of complications that come along with the reform, especially for small business owners.

  1. Labor limitations. The first problem is that the reform assumes that there is never a situation where an employee would want to work overtime without getting paid. But the reality is that employees make that decision pretty often, either because they like their job and don't mind working a little extra without payment or because they are trying to get extra experience and want to further their careers. Either way, the new overtime reform measure would limit this kind of employee choice and could ultimately discourage some of the US labor force's best and most motivated workers.

  • Increased Cost. Any way you look at it, your business is going to have to pay more. Either you pay your salaried workers for their overtime and increase your labor costs, or you cut their salaries/hours and hire some part-timers to pick up the slack, increasing your hiring, scheduling, and management costs. This is not even factoring increased regulatory fees and possible fines. Bottom line: It's going to be expensive.
  • More Red Tape. Last but not least, the new overtime reform measure will add yet another level of red tape and regulatory accountability for small business owners. Not only will you have to make sure you have documentation for hours worked, scheduled, and compensation paid - you will have to do that for each and every employee.
  • What Can My Business Do to Prepare Effectively for the Upcoming Reform Changes?

    1. Keep Updated on the Reform Bill

    You need to keep updated on the reform bill, this will ensure that you are on top of any deadlines and cutoffs that may result if and when the reform takes effect.

    Here are a couple good resources:

    2. Get Time-Tracking and Payroll Software

    With stricter regulations and reporting requirements looming, now is the time to get time-tracking and payroll software for your business. This will allow you to create schedules, track employee hours, pay employees, pay payroll taxes, and more for each employee more quickly and effectively. It will also guarantee you have documentation to back your claims up if the labor department checks in to make sure you are following the new requirements.

    3. Start Thinking Through and Planning Your Labor Strategy Now

    Although it may still be awhile before the reform bill is actually implemented, now is the time to start thinking through how you are going to deal with the upcoming changes.

    Here is what you need to do:

    1. Determine how many overtime hours your employees work on average per year.

    2. Take that number and multiply it by 1.5 your average employee hourly rate. This will give you an estimate of the amount extra you will have to spend in labor costs if employee hours and rates stay the same as current levels.

    3. Figure out whether you can afford to raise your labor budget that much for the quality of work you are getting from your current employees (not a bad time to do an employee review). If so, than you are set. If not, then you have two primary options.

    • Cut back employee hours and absorb the extra work yourself
    • Cut back employee hours and salaries and take that money to hire a new part-timer to pick up the slack

    4. Give your salaried employees plenty of warning about the changes you will be making.

    5. Do some schedule mock-ups so that you have a general idea of what schedules will change. This will give you a chance to check with current employees and iron out any major scheduling kinks beforehand.

    6. Clarify your job descriptions and task lists. This will make sure everyone knows exactly what is expected of them moving forward.


    Changes are coming and small businesses are going to have to make some adjustments. But, with diligent research, up-to-date information, preparation, and planning, your business can be ready to weather the overtime reform storm and come out positively on the other side.