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Department of Labor Overtime Rule Explained

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Overtime Rules: What You Need to Know About the New Rules

“People are going to get at least one of three benefits. They’re either going to get more money … more time with their family, or everybody is going to get clarity.”  – Tom Perez, Secretary of Labor.

This past week, the Obama administration announced massive changes to the Fair Labor Standards Act (FLSA) with the finalization of a new overtime rule. The new regulation, which has been heavily contested and two years in the making, looks to improve the working conditions and wages of middle class workers by more than doubling the threshold for “white collar” overtime exemptions from an annual salary of $23,660 ($455 per week) to $47,476 ($913 per week). What does this mean for employers? About 4.2 million workers previously not eligible for overtime now will be when this new rule goes into effect on December 1st (based on projections by The Economic Policy Institute about 13.5 million workers would directly benefit from the new overtime rule.)

Overtime Eligibility Has Plummeted Since 1975

Since being established in 1938, the overtime threshold has only been raised a number of times. With inflation, and a series of Bush era labor regulations, many argue that overtime protections have eroded in recent years. Whether workers are being reimbursed fairly or not, statistics do suggest a startling drop in the number of U.S. workers who are eligible for overtime pay. In 1975, over 60% of salaried workers qualified for overtime. Today this number stands at just 7%.

Under_New_Overtime_Rule__Workers_Earning_Less_Than_About__47_000_Will_Qualify___NPR

“Executive, Administrative and Professional” Exemption

One regulation that many critics view as a loophole allowing employers to avoid paying overtime is the executive, administrative and professional exemption (duties test) introduced by the Bush administration in 2004. Under this “test,” employers can claim that a given employee fulfills a role that is either executive, administrative or professional, and therefore does not qualify for overtime pay. Because such classifications are fairly subjective and open to interpretation, critics claim that this exemption has been unfairly used by employers to bypass paying lower wage workers (whose salaries may hover just above the current cut-off threshold of $23,660) overtime for their work over 40 hours.

In a recent New Yorker article by E. Tammy Kim, she comments on this phenomenon stating, “its [the duty test] popularity with employers has led a strange variety of low-wage employees to work fifty, sixty, even seventy hours a week without getting time and a half.” With the passing of the new overtime rule, come December 1st when it goes into effect, employers can no longer take advantage of the duties test unless they are paying their employees over the $47,476 threshold.

New Overtime Threshold to Cover 35% of Salaried Workers

Initially, the overtime proposal set the exemption threshold at $51,000. However, it was lowered to the current amount of $47,476 to adjust for pay scales in lower-wage parts of America. This threshold will cover about 35% of salaried workers and it will be updated every three years to keep up with pay levels.

Intended Benefits

If the new rule works as intended, it will play out in a variety of ways. If all else remains equal as far as worker hours and salary levels, those millions of new workers now eligible for overtime pay will be paid time and half for the overtime hours that they put in. Another anticipated trend is that we will see employers bump up the salaries of those workers near the exemption threshold to push them over the overtime cutoff. Lastly, employers may choose to limit employees to a 40 hour a week. Tom Perez, the current Secretary of Labor, commented on these outcomes, stating, “People are going to get at least one of three benefits. They’re either going to get more money … more time with their family, or everybody is going to get clarity.”

The Obama administration and supporters of the new overtime rule assert that it is a huge step towards improving the pay of middle-class workers in America. Perez, who has helped spearhead the new overtime rule exclaimed, “Our whole mission here is about strengthening and growing the middle class. In order to do that, we need to ensure that middle-class jobs pay middle-class wages.” Ross Eisenbrey of the Economic Policy Institute took it one step further, stating that the new rule, “Is really restoring rights that people had for decades and lost.”

Critics Argue New Rule Will Do More Harm Than Good

Despite this optimism, there has been staunch criticism from many employers and business associations, as well as universities, local governments and nonprofits. These groups argue that the new rule will cost employers billions of dollars. Beyond this, critics attest that the overtime rule will be detrimental to employees. To start, opponents believe that employers will be forced to convert salaried employees to hourly positions and hire less manager level positions, thereby undermining the sense-of-worth of workers and stifling their opportunities for career growth.

Furthermore, critics argue that the new rule will actually lower worker pay levels. David French of the National Retail Federation noted on this, stating, “By executive fiat, the Department of Labor is effectively demoting millions of workers… What our members have told us, what many other employers have told us, is there’s not a golden pot of money out there sitting in employers’ pockets where they can all of a sudden pay a lot more overtime pay.” French believes that employers will be forced to strip employees of their salaried positions and instead will have to pay them as hourly employees at lower amounts.

Former Department of Labor administrator Alexander Passantino has issued public statements expressing his concern regarding the new overtime rule as well. Like David French, he too believes that the overtime rule will hurt employees. Passantino’s reasoning is that the six-month timeline is far too short for employers to adjust to such massive changes in pay structure. “A lower threshold or getting to the same threshold over a longer period of time, either one those options would have been better…. I know it seems like six months is a long time, but given budget cycle and the work that needs to be done to get these compensation decisions made, it really is a sizable jump.”

So Which Side is Right?

With such drastic change on the macroeconomic level, it is hard to say which side holds better footing. Current projections contrast heavily and favor both sides of the argument. One study conducted by Oxford Economics predicts that those workers who are now eligible for overtime pay will simply “see their hourly rates decreased by an equal amount, leaving their total annual earnings unchanged.” However, another report prepared by the Institute for the Study of Labor, predicted that although base wages would fall, employees would see an overall increase in pay through overtime payments.

New Overtime Rule Certain To Face Strong Opposition in Congress

Despite the uncertainty, one thing can be guaranteed- there will be great action taken to block the passing of the new rule in congress. The New York Times reports that, “Republican lawmakers, who are close to many of the industries that oppose the new rule, have vowed to block it during a mandated congressional review period.” However, with the Trump factor in full effect, they will be forced to tread lightly as to avoid any further rifts between Trump’s blue collar supporters and the party’s establishment.

Stay Updated With Newton

Regardless of your stance on the issue, as an employer, big or small, it is vital that you stay current on all of the latest news related to the new overtime rule. Over the next few days, we will be releasing a resource guide that will offer you the best tools and guidance to make certain that you are prepared when the overtime rule goes into effect on December 1st. Follow @NewtonSoftware on twitter to receive news related to the new overtime rule as information becomes available.

 

 

About Andy Chan