The ground is shifting beneath our feet. Recent changes in labor regulations have transformed what was once a steady landscape into a seismic zone of potential risk. For tax practitioners advising small businesses, the tremors are impossible to ignore.
This episode of the Federal Tax Update podcast sounds an alarm. Host Roger Harris puts it bluntly: “If you’ve ever had a business go through an audit by the wage and hour people, it’s awful. It is the worst that you’ll ever go through.” This stark warning sets the tone for a discussion that every tax professional needs to hear.
Significant changes to overtime rules, child labor laws, and non-compete agreements are at the heart of this regulatory upheaval. These shifts present substantial compliance risks for small businesses, demanding that we, as tax practitioners, stay informed and offer proactive guidance to help our clients avoid costly violations and adapt their practices effectively.
As we examine the key insights from this podcast episode, we’ll explore how regulatory shifts reshape the small business landscape and how we can help our clients navigate these changes.
The New Overtime Pay Landscape
Imagine waking up to find that your payroll costs could skyrocket overnight. This nightmare is becoming a reality for many small business owners as recent changes to the Fair Labor Standards Act (FLSA) reshape the overtime pay landscape.
Starting July 1, 2024, the salary threshold for overtime exemption leaps to $844 per week—about $44,000 annually. But brace yourself for another shock. Annie Schwab warns about a further increase soon after: “The annual salary for these types of workers starting in January [2025] will be nearly $59,000.” This represents a total increase of about $23,400 from the current threshold in just 18 months.
This seismic shift leaves many small businesses at a crossroads: substantially raise salaries or start paying overtime. But it’s not just about the money. Roger Harris states, “You have to qualify as one of these four groups… Then you have to pay them a salary and then it has to be the right amount of salary.” These groups—executive, administrative, professional, and outside sales employees—each come with specific duties tests, such as the ability to hire and fire (for executives) or the use of discretion and independent judgment (for administrative employees).
Consider a small retail business owner who promoted their best salesperson to “manager” with a $40,000 salary. Despite the title, if this employee spends most of their time making sales rather than managing, they might not meet the duties test for exemption. Come July, the owner faces a tough choice: bump the salary to $44,000 and adjust responsibilities or start tracking hours and paying overtime.
Child Labor Laws: Opportunity Meets Compliance
“Bring your child to work day” takes on a new meaning when you’re a small business owner. Child labor laws, designed to protect young workers, can open doors to unique opportunities—if you know how to navigate them correctly.
For small business owners considering employing their own children, the benefits can be substantial. Annie Schwab outlines the potential advantages: “You get to deduct the wages that you pay your child from your net income of your business. And if the child is under 18, then you don’t have to worry about FICA or Social Security or Medicare.”
However, compliance isn’t optional—it’s essential. As Schwab emphasizes, “The same rules apply. It has to be a safe environment. It has to be something that they can do, actual work, real work.” This means no paper-pushing or busy work; the employment must be legitimate and age-appropriate. Remember, certain industries have strict age restrictions—for example, you can’t hire anyone under 18 for roofing work.
Consider a family-owned bakery. The owners’ 16-year-old could help with customer service or basic food prep, but operating heavy machinery or working late nights would cross the line. The key is finding that sweet spot between opportunity and compliance.
The Shifting Sands of Non-Compete Agreements
Imagine building a successful business only to watch your star employee walk out the door, taking your clients’ and trade secrets with them. Non-compete agreements have long mitigated this scenario, but the ground beneath these protective measures is shifting dramatically.
A proposed ruling by the Federal Trade Commission (FTC) could render non-compete agreements unenforceable for most employees. While not yet final, this potential shift could leave many small businesses, especially those in professional services, exposed and vulnerable.
Roger Harris underscores the gravity of the situation: “Consult with your attorney and see what you can or cannot do to protect yourself, not only from them taking [clients] from you while you still own the firm, but making it more difficult to find a buyer of your firm because they see a huge risk in your employees.”
Consider a small accounting firm. Previously, they could prevent a departing CPA from setting up shop next door and poaching clients. Now, that safety net may soon be gone. The implications extend beyond losing clients—it could significantly impact the firm’s value when the owner is ready to sell.
However, all is not lost. Non-solicitation agreements offer an alternative strategy. While employees can’t be prevented from competing, they can be barred from actively soliciting former clients for a reasonable period.
The Looming Threat of Wage and Hour Audits
Picture this: A knock at the door, a team of stern-faced auditors, months of meticulous examination of your payroll records—welcome to the nerve-wracking world of wage and hour audits.
Roger Harris doesn’t mince words about the severity: “It is the worst that you’ll ever go through… Usually they don’t come in unless there’s been some sort of complaint. They don’t have people just roaming around looking to do audits. But if an employee were to complain… they come in and they’re on the side of the employee and they make that very clear.”
The consequences? Potentially devastating. Hefty penalties, back pay requirements, and a tarnished reputation can cripple even the most robust small business. And it’s not just blatant violations that trigger these audits. Harris shares a cautionary tale: “The delivery person was an older gentleman whose wife had passed away. He lived alone. He liked companionship, so he would come into the pharmacy at 11:00 and just sit around and talk to people until 1:00.” This seemingly innocuous scenario resulted in the business owing overtime pay for those extra hours.
What’s more, it’s incredibly easy for employees to file complaints. Many states have websites where workers can anonymously report violations, making it crucial for businesses to stay vigilant and compliant.
As tax practitioners, our role in helping clients avoid these audits is crucial. We must conduct regular “mock audits,” help establish clear workplace policies, advise on robust timekeeping systems, and educate clients on the nuances of labor laws, including often-overlooked areas like “on-call” time.
As we’ve navigated through the shifting sands of overtime rules, the delicate balance of child labor laws, the crumbling foundations of non-compete agreements, and the looming specter of wage and hour audits, one thing becomes clear: the landscape of labor regulations is not just changing—it’s being completely reshaped.
This seismic shift presents both a challenge and an opportunity for tax practitioners. We’re no longer just number crunchers; we’re becoming strategic advisors, helping our small business clients navigate a complex maze of compliance issues. From structuring compensation to protect against overtime violations to crafting alternative strategies for protecting business interests without non-competes, our role has never been more crucial.
To master this new terrain, listen to the full Federal Tax Update podcast episode with hosts Roger Harris and Annie Schwab. Stay informed, stay proactive, and keep listening.