Cash is king for business owners, plenty of it can make your dreams come true, and a lapse in cash flow can sink everything. One of your most important expenses as a business owner is payroll, and things could get a lot pricier starting Jan. 1, 2020, thanks to a change in overtime rules.
New Overtime Rule
In 2004, the US Department of Labor (DOL) established $455 per week as the earning level at which employees would become exempt from the Fair Labor Standards Act (FLSA) laws regarding minimum wage and overtime. Essentially, employees earning anything below that threshold are eligible for overtime pay.
As of Jan. 1, 2020, the limit will be raised to $684. This means that even more employees, 1.3 million in the U.S. by the Department of Labor’s estimation, will be eligible for overtime pay. While this is a big change, it pales in comparison to the proposed change of $913 per week from 2016.
Other changes coming with the new rule include:
Raise the total annual compensation level for highly compensated employees from the current $100,000 per year to $107,432 per year;
Allow employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10% of the salary level; and
Revise the special salary levels for workers in U.S. territories and in the motion picture industry.
If your small business has employees, your payroll could shift dramatically in 2020 in order to stay compliant. What can you do?
Handling the Change
Any change for your small business will require more of your precious time as a business owner, and this is a big one. Make sure to set apart time to consider the following ideas and more that could help your business save cash and deal with this change like a winner.
Have a backup plan for making payroll.
There are plenty of times as a business owner when you have to outlay goods or services upfront to get paid later, but staying cash flow positive when you’re doing that consistently can be a struggle. As your business adjusts to the new overtime rules in 2020, you’ll want to make sure you have a backup plan to help cover expenses if cash flow gets tight. A business line of credit is a solid option, since you can open the line now and use it when you need it, only paying for the money you borrow. If you need to dip into it for payroll specifically, it’s a better option than a credit card since credit card cash advances don’t come with a grace period (so you start accruing interest immediately) and cash advances often come at much higher APRs than business lines of credit do. (Nav can connect you to the right line of credit for your business based on your business and credit profile using our eligibility tool. You can access the free tool by signing up here.)
Consult your business plan, and adjust.
If you haven’t taken time to adjust your business plan, now is as good a time as any. This should be a relatively regular practice for you as various changes take place within and outside your business.
This can do a number of things, including reminding you of your mission statement and core values, which can provide clarity on how to handle such a major change. It can also be a prime time to adjust your business plan and keep it ready for times you may need it, like applying for a loan. Nav’s Business Loan Builder plan can also help you get ready for a big loan application and bridge the gap to that next step.
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Budget, budget, budget.
The first place to look is your budget. You’ve likely allocated a certain number of dollars to covering payroll, and that number will more than likely need to change. How does that impact the rest of your business? Where can you cut spending? Equally important, where can you not cut spending?
Paying more in overtime or other expenses related to this change will impact your balance sheet, so be sure to revisit and make proper adjustments. You can find a balance sheet template here:
Time for a few raises?
Speaking of number-crunching, consider the impact that giving out a few raises to some employees might have against paying those employees for overtime work. This could be a win-win; your employee gets a great raise, and you get to avoid paying more in overtime.
Look at the various services and functions performed by your current staff. Are there any that could be performed by outside services or freelancers? While layoffs are far from the best thing for morale, consider the values and goals outlined in your business plan. Is this a tough choice that will pay off in the long run?
If so, keep in mind that there are a number of business services that can provide efficient work and save money, as well. Depending on the type of vendor, they can also help you build business credit as you make timely payments.
Working with freelancers can also help you bring in diverse talent that can add tremendous depth to your business. While moving from a full-time employee to a freelancer or outside service is a difficult choice to make, it can pay dividends when made at the right time.
Dealing with regulatory changes are one of the biggest pain points of owning a small business. While this can cause a strain on your budget and possibly force you to make a tough choice regarding personnel, it can also be a great growth moment for your business and for you as a business owner.
Consider your goals and values, adjust accordingly, and set your business up for success (and compliance).
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This article was originally written on November 12, 2019 and updated on October 3, 2023.
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