Federal Judge Blocks FLSA Overtime Rule; Possible Winners And Losers

A federal judge in Texas blocked President Barack Obama’s changes to the Fair Labor Standards Act (FLSA), which would have drastically increased overtime pay for white-collar workers. Under the May 18 initial overtime expansion, starting December 1, salaried executive, administrative or professional employees earning less than $47,476 per year would be eligible for overtime pay, increasing the threshold from $23,660.

While the new rule had the potential to impact practically every industry, analysts saw it as a specific headwind or tailwind in a few.

Perceived Upside Shot Down For Payroll Software

One possible winner from the initial changes was payroll software providers. In August, Paycom Software Inc PAYC announced its FLSA toolkit as a means to capitalize on the changes.

“The company is actively touting FLSA as a tailwind that can help drive new customer wins along with up/cross-sell opportunities within its installed base,” said Stifel analyst Brad Rebank in a note published in early August.

In contrast, UBS analyst John Byun doesn’t see it having a great impact on the sector. Most companies in the payroll space have downplayed any potential revenue benefit from the changes, so the current block “should be manageable,” said the analyst.

“Government can be unpredictable,” said Byun, “so most have to keep focusing on the core run rate business of adding new payroll/HCM customers.”

Headwind For Dollar Store Stocks

Barclays analyst Karen Short identified the changes as a major headwind for Dollar Tree, Inc. DLTR starting in Q4 in a note published earlier this month.

“New FLSA changes will begin to pressure selling, general and administrative costs starting in December,” said Short.

In a note published in August, BMO Capital Markets analyst Wayne Hood stated that FLSA costs would have a $0.03 to $0.04 impact on Dollar General Corp. DG's EPS in Q4 2016 and a $0.06 EPS impact overall throughout 2017.

With the latest block, and a republican administration, Dollar Tree and Dollar General may be able to avoid these pressures.