Why Obama’s New Overtime Rules Could Be a Wet Blanket for Small Businesses by Jeremy Quittner @FortuneMagazine June 3, 2016, 2:34 PM EDT E-mail Tweet Facebook Linkedin Share icons Here are some common things that workers tend to do: check Blackberries or iPhones at home after office hours; catch up on work email on weekends; burn the midnight oil to crunch on critical projects; travel for work. Yet such activities could all be curtailed dramatically as the Labor Department’s new overtime regulations kick in Dec. 1. The new rules increase the salary threshold at which businesses must pay overtime. This is the first increase in 12 years, and only the second in more than a generation. Under the new rules, salaried workers who make $47,476 a year or less are eligible for time-and-a-half overtime pay if they top 40 hours a week. Before now, only workers making $23,660 or less were eligible. The rules don’t apply to hourly workers, who are eligible for overtime no matter their earnings. The Obama administration, which directed the Labor Department to look into making overtime changes in 2015, says the update will raise wages by an average $1.2 billion annually, and will extend overtime protections to 4.2 million workers not currently eligible. It will also require the Labor Department to update the overtime salary threshold every three years. But business owners and labor experts say that’s too much too quickly, and the move is likely to create a number of negative side effects, most notably less versatility in workforces as businesses shift previously salaried employees back to hourly wage–earner status to control costs. What’s more, they say employees who are most likely to feel the brunt are young workers, salaried for the first time, who are gaining key work skills as they embark on paths as managers. “One benefit of working for a small business is that you have more flexibility than you do in a larger business,” says Allan Bloom, co-head of Proskauer Rose’s wage and hour practice. “One of the big issues for them will be a loss of worker flexibility.” That rings true for Bryan Pate, chief executive and co-founder of ElliptiGo, an elliptical bicycle manufacturer with 22 employees, based in San Diego. The company was founded in 2005 and officially launched in 2008. Pate says his salaries are competitive, but they are also his biggest cost. Due to the rule change, he’s likely to move one recently salaried manager back to hourly status, and to hold off on moving two other workers from hourly wages to salaries. “It [will] put a damper on their ability to evolve in the company,” Pate says. For the newly salaried manager, the move back to hourly status will not only feel like a demotion, but pose pay challenges, as the job involves making calls at irregular hours to logistics companies in Europe and a factory in Taiwan, Pate says. While manufacturers have their concerns, the retail and restaurant industries are expected to feel the pinch from the overtime changes perhaps more than any other industry. Some 3.3 million retail workers are managers or supervisors who are currently exempt from overtime rules, the National Retail Federation estimates in a study from May 2015, and roughly two thirds will feel the effects of the changes directly. Approximately 700,000 workers could be converted to hourly from salaried positions, and a quarter of a million workers will have their hours reduced. Related: Is This the Proposal That Could Save Crowdfunding? It’s not all bad news, however. The study also indicates nearly half a million people would earn approximately $11,600 more in overtime pay, and about 100,000 would see their salaries increase as a result of overtime, but those gains might be offset by reductions in base wages, bonuses and other benefits. Terry Shea, the co-owner and co-founder of Alabama-based gift store chain Wrapsody says that while she’s not entirely certain what the final outcome will be, the rules could ultimately create a less accommodating workplace where employees have fewer learning opportunities. Not only will she have to carefully track her salaried employees’ hours, but she may have to abandon plans like taking them with her for things like buying trips to gift markets around the country. “They network and get to see the other vendors out there,” Shea says. “And this adds to their experience at the store level.” It’s the youngest ones who are likely to suffer most, says Elizabeth Falconer, president and founder of model-home furnisher Position by Design in Fort Worth, Texas. Falconer has four full-time employees at the firm, two of whom are salaried above the new threshold. Her firm is growing quickly, however, with expected revenues of $1.2 million for 2016, about double what they were in 2015. Falconer says she had hoped to hire a design student this year, following an internship, giving that person a salaried job at or near the local median wage, which is about $42,000. In return, that person might have worked 18 to 20-hour days during crunch time to get jobs done. Now, instead, she’s likely to just hire hourly contract workers at more regular hours. “Instead of hiring that person, I will take the older [salaried] worker here and let her direct more of the hourly people,” she says.