Businesses statewide are recalibrating payroll systems as Alabama’s tax exemption on overtime pay expires June 30.

The nine-month pilot, once celebrated as a national model for worker relief, ends with little fanfare. Lawmakers declined to renew it after costs ballooned to ten times original estimates and critics argued it favored higher earners.

Initial projections in 2023 suggested the exemption would cost $34 million annually. Instead, it drained $350 million from Alabama’s Education Trust Fund, which finances public schools. Kristen Baldwin, Director of Compliance at CO Advantage, said the numbers forced a hard choice: “Without caps, claims exploded when overtime surged in manufacturing and healthcare. Renewal became fiscally impossible.”

The policy’s collapse marks a dramatic reversal from a few years ago. Lawmakers passed the exemption in 2023 as part of House Bill 217 with bipartisan support. Governor Kay Ivey even vetoed a proposed $25 million annual cap, calling it “a direct investment in workers.”

By 2025, consensus shattered. Democrats like Representative Anthony Daniels called the expiration “a betrayal of workers,” while Republicans pointed to unsustainable costs. Independent analysis revealed deeper issues.

The Budget Unraveling

Initial 2023 projections estimated a $34 million annual cost. Instead, the exemption drained $350 million from Alabama’s Education Trust Fund (ETF), which finances public schools.

Kristen Baldwin, Director of Compliance at CO Advantage, confirmed the uncapped design allowed runaway claims but hinted other issues may be at play: “Overtime surged in manufacturing and healthcare, but we also saw unexplainable spikes in sectors like logistics.”

– “The Montgomery Advertiser” uncovered rumors of high-earning professionals reclassifying salaries as “hourly overtime” to exploit the tax break—a loophole policy architects allegedly overlooked. Reporter Alex Johnson cited anonymous CPA sources describing “creative payroll adjustments” at Birmingham firms.

– “Alabama Political Reporter” noted concerns from economists that companies in historically low-overtime industries (like tech) restructured schedules purely to maximize the benefit. One Decatur tech startup reportedly shifted salaried staff to hourly roles mid-pilot.

– WFSA 12 News revealed the state’s revenue department lacked tools to verify overtime claims. Investigative journalist Mara Bailey quoted a DOR whistleblower describing “no mechanism to cross-check timesheets against shift logs.”

Confusion also plagued small businesses along the way according to reports.

– Payroll providers described “chaotic adjustments,” with Warren Averett CPAs telling the news outlets that some clients converted salaried employees hourly solely to qualify.

– Workers remained largely unaware. “Most never realized their checks were bigger,” Rep. Daniels conceded—undermining political support.

What should Huntsville business owners do now that the time span has ended?