Department of Labor Issues New Expanded Overtime Rules

By: Megan J. Muoio, May 26, 2016

On May 18, 2016, President Barack Obama announced that the Department of Labor will be finalizing a new rule expanding the payment of overtime wages to a larger class of workers who are not currently eligible for overtime pay under federal law. The aim of the rule change, according to the Obama Administration, is the expansion of overtime protections and the boosting of wages for middle class workers. However, the rule change may have different results.

Currently, hourly workers are entitled to be paid the overtime rate of time and a half for each hour they work over 40 hours per week. Salaried workers who make more than $23,660 per year and who are managers, supervisors, or fall into certain classes of workers (as determined by the “duties test” under the Fair Labor Standards Act) are not entitled to time-and-a-half wages for any hours they work over 40 hours per week. The class of full-time salaried workers entitled to overtime pay has shrunk from 62% in 1975 to just 7% today.

The Obama Administration seeks to reverse this trend and raise the salary threshold equivalent to as if the $23,660 threshold set in 1975 were indexed to inflation. The Administration hopes to extend overtime protections to an additional 4.2 million workers (of whom approximately 1 million work overtime each week) and boost wages by $12 billion over the next 10 years. By increasing the salary threshold from $23,660 to $47,476 per year, white collar workers who had previously worked more than 40 hours per week with no increase in pay will now see a benefit. The salary threshold will be updated every three years. The Department of Labor tempered these changes by maintaining the current “duties test” applicable to determine whether employees are exempt or nonexempt under the Fair Labor Standards Act.

Employers are skeptical regarding the cost and actual effect of the new rule. The National Retail Federation has estimated that the rules will cost the restaurant and retail industries $745 million and create an overall negative effect on employment rates, especially for small businesses. The investment bank Goldman Sachs has predicted that employers will respond in four ways to the rule change. First, employers may simply make overtime payments for more workers. Second, employers may reduce employees’ base pay so that the total compensation after overtime payments is unchanged, although the effectiveness of this strategy will depend on the employer’s ability to predict how much overtime employees will work from week to week. Third, employers may increase employees’ base pay to bring employees above the new $47,476 threshold, which is likely for employees who already earn a salary close to that threshold. Finally, employers may hire more employees and limit all employees from working more than 40 hours per week. It is estimated that employers who choose this option could create 100,000 additional jobs.

The new overtime rule will take effect on December 1, 2016.


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