Small Businesses Must Prepare for New Overtime Rules, Thresholds

New US Department of Labor Laws, effective December 1, could impact IT service provider payrolls, profit margins and cash flow. But proper financial planning could help to minimize or eliminate the challenges, channel partner experts say.

Updated 2:00 p.m. ET, Sept. 23: NFIB Backs Six-Month Delay of New Overtime Rule

The Memphis Daily News captures the crux of the issue:

“Under the revised rules, salaried employees earning less than $47,476 annually ($913 per week) will be entitled to time-and-a-half pay for work that exceeds 40 hours per week. Currently the salary cutoff for overtime pay is $23,660 ($455 per week). The revisions are expected to disqualify up to 10 million U.S. employees from their current exempt status.”

Multiple organizations — including HTG Peer Groups and TruMethods — are preparing VARs and MSPs for the financial changes.

Preparing VARs, MSPs for the Shift

HTG Peer Groups, an organization that mentors hundreds of MSPs, has been tracking the new regulations since earlier this year.

Scott Scrogin

Scott Scrogin

Arlin Sorensen

Arlin Sorensen

“HTG members have been working on the changes for six months or more, some aggressively; some less so,” said Scott Scrogin, president of HTG. “One member was finished with all consultant/legal engagements, reclassifications, job descriptions and internal communications by July.” HTG also conducted webinars on the topic to drive home the issue’s importance.

Still, there’s plenty of additional work to be done. “This has been a big topic at HTG for the past few quarters,” said HTG CEO Arlin Sorensen “It will be a significant impact to a number of our members. Bottom line is that there are lots of discussion and still lots of questions.”

The general consensus, Sorensen added, is that many MSPs will need to reclassify some folks and become more focused on tracking time and managing schedules. “Ultimately it will probably hurt employees that it impacts, as employers cut hours to make sure they are in compliance,” he said. “Whenever government sticks its nose into how business works, unintended consequences are always a bigger issue than what they are trying to correct.”

Sorensen compares it to the $15-an-hour minimum wage push, which can backfire by reducing the number of jobs and internships available.

Big Concern: MSPs in Reaction Mode

Although organizations are working hard to educate MSPs, most IT service providers may be overlooking the potential challenges ahead, according to TruMethods CEO Gary Pica.

Gary Pica

Gary Pica

“My first concern is that not enough business owners are talking about it,” said Pica. “Most MSP business owners will be impacted by this pending change. Unfortunately they may not deal with it until an employee brings it to light.”

At that point, the business could be subject to back penalties in addition to back wages, Pica added. As December approaches, TruMethods plans to get the message out to all members. “Every business owner should talk to their accountant to be sure they are compliant,” he concluded.

Consider yourself warned.

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    Gerard louise:

    For too long, many employers have profited from this ridiculous current exempt rule to maximize their own profits and avoid paying overtime… Most decent MSP’s pay they employees for overtime and exempt employees working in these businesses should be making enough money to never need overtime… As a business owner, I applaud these new rules…

      Joe Panettieri:

      Gerard: Thanks for bringing the “employee” view into the conversation. For the business owners, I think the big issue is lack of preparation. Many MSPs struggle with their existing business models and associated financials. The thought of having to “change” those models because of a new government measures only adds to stress levels. Build a business model that pays folks a fair wage within a reasonable workweek, and a lot of this potential stress goes away…

      Jeff Lorenzen:

      I second Gerard’s comment. Every MSP owner need to read this thread on Reddit.
      It will open your eyes to how engineers honestly feel about working for an MSP. Underpaying staff and placing too many demands on billable hours does not do anything to help retain your customer relationships or maintain your workforce. There are some very common practices in our industry, including those supported by the contributors of this article and those around them, that I simply could never agree with. They’re not realistic models and MSP owners should stop looking at their business as a way for them alone to get rich and share the success of their company with their staff. No salaried employee on my staff makes less than the new law, and never has. If they’re at that level to get a salary in the first place, they are senior engineers and deserve the market rate and benefits that go along with it.

        Joe Panettieri:

        Hey Jeff: I can relate to both sides of the discussion — the owner and the employee. When I was a kid, I was a waiter. I assumed the restaurant owner was making tons of money, while I was making small-time tips. Fast-forward 30 years and I now understand:

        (A) how hard the waiters/waitresses work and how every dollar helps; and
        (B) how hard it was for the restaurant owner to build a business. And that during many points in a business’s life, it could be losing money.

        The situation is similar across the MSP landscape. The issue is never cut and dry. There are valid points of both sides of the discussion. In some ways, I think things like open-book management — where employees have a feel for the business’s financials — help to close the divide between owners and employees.

        Thanks for your readership and for posting the comment.


    Joe Panettieri:

    This just in: New legislation, backed by the NFIB, seeks six-month delay on new overtime laws.

    Luis Alvarez:

    As an MSP that has been doing business in California for over 16 years, I’m always amused when these kind of federal rules go into affect, impacting the rest of the country. I can tell you our overtime rules are even stricter than the federal rules and have been for years, so those of us who do follow the law (and not all do) have been dealing with this for a long time. One thing I hope that comes of the new overtime rule is better enforcement. We are frequently at a competitive disadvantage when it comes to our pricing model because many of our smaller competitors choose to ignore the overtime law, make all of their employees “exempt” regardless of what they are paid, which let them include things like 24×7 support without any additional fees. Their poor employees are ignorant of the laws so they get abused for as long as they stay and the owners of those companies get to enjoy literally free labor.
    I’m with Gerard; this is good for our industry and will help level the playing field to some extent.

      Joe Panettieri:

      Hey Luis: Thanks for the detailed thoughts. And for your readership over the years. I know lowball pricing has harmed some MSPs. Let me know if/when you ever see any type of “enforcement” emerge. We’d welcome the opportunity to cover that trend.

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