As the owner of helpdeskHR, South Austin Business Association member Shasta Erickson offers customized, scalable human resource solutions to small businesses—the group she predicts will be most impacted by overtime restrictions.

“Smaller businesses will take the biggest hit because they tend to have fewer people, so less of an ability to shift job duties to spread the wealth, so to speak,” she said. “It’s on the owner to really look at efficiency and see where improvements can be made.”

Updated FLSA regulations from the U.S. Department of Labor go into effect Dec. 1 and change the salary threshold that determines which white-collar workers are exempt from overtime pay. Full-time, salaried workers making $23,660 or more per year do not currently qualify for overtime pay. On Dec. 1, that salary level changes to $47,476 or more per year, forcing some businesses to re-examine their payroll.

To comply with the regulations, employers have several options. Paying or restricting overtime, changing employee classifications from salary to hourly, or increasing salaries to meet the exemption minimum are all suggestions floated by the DOL, but for many small businesses, those solutions are not viable.

“The biggest concern is how much it’s going to cost,” Erickson said. “It’s going to be really tough for a lot of companies to make that adjustment financially.”

To compensate workers for overtime, businesses are required to pay time-and-a-half wages, which for small businesses can be cost-prohibitive. Additionally, the new law requires keeping close tabs on employee hours to ensure workers are compensated fairly, requiring the use of new time-tracking services­—adding another layer of cost to a business’s bottom line.

A representative from the Greater Austin Chamber of Commerce said the organization does not have a position on the new FLSA overtime rules. However, other area chambers of commerce, including those in Cedar Park and Round Rock, joined more than 50 Texas business organizations in filing a lawsuit Sept. 20 in a U.S. District Court against the DOL’s overtime rule.

The lawsuit, led by the U.S. Chamber of Commerce, National Association of Manufacturers and the Texas Association of Business, claims the federal government “went too far in the new overtime regulation.”

Executives at Whole Earth Provision Co., an Austin-based specialty retailer with a storefront located in Southwest Austin, have been implementing practice compliance for two months, and through doing so, Vice President Holland Jones said he discovered just how far-reaching the new FLSA regulations can be.

“There is a chunk of our people who this will affect, and because of that we have been working on this for a while,” Jones said. “It’s a complicated and complex process. It will impose cost and burden administratively and reduce flexibility. We are perfectly willing to comply, but certainly there are extra costs.”

For some employers, the simplest way to soften the blow to their budget is to shift employees from salaried to hourly wages. According to Steven Bercu, founder and president of the Austin Independent Business Alliance, this is the solution he and other small-business owners have implemented for their employees.

“What most of us have had to do is return many people from salary to hourly wages because they don’t meet the salary requirement in dollars,” he said. “With the salary [threshold] increase, lots of people in independent businesses are simply not going to meet the qualifications.”

An alternative solution is to prohibit overtime by not allowing employees to work beyond 40 hours; however, for businesses that cannot predict the amount of time it will take to perform a service, this is not a viable solution.

Servando Varela III owns Anything Around the House, a Southwest Austin-based business that provides home repair and remodeling services. For Varela, implementing a cap on hours to eliminate overtime cost is not realistic because the amount of time it takes to complete certain tasks can fluctuate and is subject to various factors, he said.

“From a customer-service aspect, our service would fall,” Varela said. “The amount of time it takes to complete a job depends on what we are doing. If we have bad weather and we are behind, we feel obligated to catch up, which means we might have to work on Saturday or for an extra hour.”

Because of this, Varela says he may be forced to pay overtime wages in order to stay competitive in an industry in which some other employers do not abide by FLSA regulations.

“You have two different dynamics,” he said. “One business that is totally accountable legally, and another being run with no accountability and no checks and balances. Our payroll is reported to the IRS every week, so we are subject to all of the scrutiny that comes along from the local, state and federal government.”

Who’s going to pay?

For those business owners who have no choice but to pay overtime or  increase salaries, Bercu said the costs will be passed to the consumer.

“In most retail businesses, the retailer will simply raise the price of everything to pay for this,” Bercu said. “None of this stuff is free—the money has to come from someplace.”

Small businesses in particular do not have the capital to hire additional help to minimize the workloads shouldered by salaried employees, said Bercu, who also owns the shop BookPeople.

“Small businesses don’t have middle management. Those are concepts from much larger businesses,” he said. “They don’t operate on massive margins, so it is very difficult for small businesses to absorb cost without passing it to the consumer.”

For Varela, whose company employs 12 people, overtime costs may lead to a slight increase in the price of services.

“There will be a price increase—I’m hoping it’s not directly noticeable by the customer, but that is yet to be seen,” he said. “Balancing the new federal regulations with all of the other increases that will be happening this year, such as health insurance and liability insurance … something has got to give.”

For Bercu’s business, the rise in operating costs will lead to a smaller staff.

“The way we will ensure that we don’t have a loss is by returning people from salary to hourly, restricting overtime and probably reducing hiring a little bit to make sure we don’t exceed the percentage of labor dollars we need to stay profitable,” he said. “Reducing staff is a method of achieving the right labor numbers, which will be pretty common, I think.”

Although the new laws will not affect workload or pay, Jones said, the decrease in flexibility will be a big adjustment for some Whole Earth employees, who up until now have had freedom to self-regulate their time.

“The only downside is on the employee side,” he said. “It requires a level of company and employee formality that was previously more flexible and employee-controlled.”

According to Erickson, for salaried workers, punching the clock can feel like a demotion, which jeopardizes employee morale. To ease into the new protocol, she suggests business owners sit down with their employees to explain why precise timekeeping is essential.

“For somebody who has been on salary for years and can come and go as they please, being subject to a time clock can be a real morale-killer,” she said. “It’s really going to take careful conversations with employees to make them understand that this is not a criticism of their performance—it’s a federal change.”

The upside

Salaried workers whose hours were not previously tracked stand to benefit from the new FLSA regulations, according to Erickson, who said many of these individuals hold professional, administrative or executive positions. The law ensures that if an employee works over 40 hours, he or she will be compensated appropriately.

“The positives come from trying to make working conditions more fair for employees who maybe have been overworked and underpaid,” Erickson said. “That is what this law is trying to address—to bring more equity to the workplace.”

For businesses that have observed fair labor practices consistently, the regulations will level the playing field.

“This was obviously put in place to make the bad apples conform,” Jones said. “For someone like us who has for years always tried to keep this a priority, this just codifies something we were already doing.”

Additional reporting by Amy Denney