New OT Rules Will Hurt, not Help, Entrepreneurs


I’ve got some frenemies in Washington.

Actually, all entrepreneurs who want to build great companies with great teams of hard-driving employees have been sucker punched by the very people who give us awards, stop by for photo-ops during election seasons, and say we are the “engine of America.”

Startups, during the first five years of operations, create enough jobs to make up for all the nation’s job losses caused by corporate downsizing, off-shoring and business closures. And how are we repaid for all the risks that we are taking? With a sucker punch of new regulations that will make it suddenly more costly to operate and of course to create new jobs.

The latest big blow has come in the form of a substantial change in the number of employees who fall under qualification for overtime pay. Starting December 1, 2016, the annual salary threshold for overtime pay coverage will jump for certain types of employees who earn less than $47,476, representing more than a 100% increase over the current $23,660 threshold. The new regulations also apply to certain highly compensated employees who earn between $100,000 and $134,000.

Further, the changes apply to all businesses, even businesses with fewer than 50 employees and non-profit organizations. Business owners will experience the pain again as the coverage thresholds will adjust upward every three years no matter the condition of the nation’s economy. Ouch!

The Department of Labor’s website blogs are rather cavalier in their recommendations to employers. They imply the choices are simple: just boost qualifying employee salaries to over $47,000, pay the overtime or don’t allow targeted employees to work over 40 hours a week.  If it were only so easy to operate in a just-in-time economy!

There is another component of the new regulations that has all small businesses against the ropes. The new regulations take effect this year giving business managers little time to determine their compensation game plan and then rework budgets and implement new procedures for monitoring who is working on what, when and for how long.

A genuine friend of small business owners would have given more warning or would have exempted the most vulnerable industries within the small business community. The White House and company didn’t. Democratic-leaning business owners are disappointed; Republican-leaning business owners are saying, “I told you so.”

My suspicion about rules like this is they are crafted by people who have never started or worked in a meaningful way in a growth-oriented small business. They don’t appreciate how little extra cash small businesses have for nasty surprises, let alone investment in new initiatives.  Career government workers also don’t seem to understand what drives entrepreneurs and the people who leave higher paying jobs to work for them. Let me break it down:

We’re not clock punchers. Walk into any startup company and you will find hard working people having a great time at work. We love the challenge and satisfaction that comes with turning ideas into tangible products. Our drive and commitment to our company’s advancement doesn’t switch off after 40 hours. It’s not just the founders that are up at 5 am talking to prospective customers in Europe or testing out a prototype before a big buyer presentation, but the staff.

The fast way to take the creative joy out of an entrepreneurial company is to ask highly productive people to log the time associated with every late night or weekend phone call, email or other work on behalf of the company. That’s when fun work becomes tedious work.

We are not motivated by overtime pay. Why do staff members put extra time into a growing business they love? To get the job done. To help a young company advance. To have a chance of being a part of something special. To earn a greater stake in the business’ success through stock options and group-earned, year-end profit sharing plans.

We will ultimately “work around” the regs. The new regulations will motivate business owners to hand over extra work to independent contractors rather than stretch in-house staff with new challenges and opportunities for advancement. Is this what the Department of Labor really wants? More freelancers with less benefits and job security?

Rule changes cost money. The Department of Labor says that compliance won’t be costly to small business owners.  For a small business, the Department projected that it would spend only one hour to learn about the rule, one hour per worker to determine new compliance costs and roughly five minutes each week for new scheduling and monitoring costs for a total per entity cost of only $100 to $600.

Contrast this wishful thinking to the real world. It took me several hours to read the fine points of the more extensive regulations. Businesses that turn to payroll specialists or legal counsel can expect to pay up to $600 per hour to help avoid making compliance mistakes. In the real world, employee compensation decisions involve benefit packages, bonus payments, profit sharing plans, stock option plans and performance metrics. New timekeeping systems will have to be created and implemented before the holiday season. This isn’t simple and it will take time and cash to get it right.

I do appreciate the Department of Labor’s drive to boost middle class salaries in America. I’m all for it too, but not in this way. Good jobs don’t trickle down from large corporations but are created and nurtured from teams of people who want to get involved in ground floor opportunities and build from there.

A genuine friend of the entrepreneurial community would do everything possible to lighten the load of regulation and spare fledgling businesses from sudden shifts in cost structure to help them thrive.

Susan Schreter is a veteran of the venture finance community, expert on startup sustainability and CEO of Start on Purpose, a service organization that offers the largest free directory of debt and equity funding sources in America.  Connect with Susan @StartonPurpose.