New thresholds for overtime pay have some up in arms, while others are jumping for joy, claiming it's about time!
After 12 years, the United States Department of Labor has taken steps to extend overtime pay protections by updating the regulations defining which white-collar workers are protected by the Fair Labor Standards Act's minimum wage and overtime standards. As of December 1, 2016, any worker engaged in interstate commerce or employed by a business with more than $500,000 in revenues, must either be paid a minimum salary of $47,500 per year or be paid time and a half for any hours worked over 40. Likewise, the total annual compensation requirement for highly compensated employees (HCE) will increase from $100,000 per year to $134,004 per year. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
The minimum standard salary and compensation levels needed for executive, administrative and professional workers to be exempt had been $455 a week or $23,660 a year. As of December 1st, those weekly salaries will have to be a minimum of $913 a week. The rule does allow for employers to reach this minimum with lower weekly salaries, in some cases, such as non discretionary bonuses.
For those who question whether this new threshold has any fair relation to actual market rates or job descriptions, the DOL has an answer. This salary level and those to follow will be set to the 40th percentile of earnings for a full-time salaried worker in the lowest wage census region. (Currently that region is the south where workers in the 40th percentile earn $913 per week on average and $47,476 for a full year). The rule will require those salary levels be adjusted as necessary every three years.
Critics argue this rule change could lead to disastrous consequences for the economy as employers seeking to avoid the increased costs of salary or overtime will inevitably demote salaried workers to hourly positions and then cut or limit their work week to 40 hours per week. That may be true, but to meet demands of the work, they will likely have to create more jobs to take up the slack.
Some business groups argue that the rule will raise compliance costs and paperwork as more workers will be subject to time keeping, but my counter to that is the argument that this won't be true if those employers increase the salary and keep the employees exempt.
Another concern has been that employers may game the system by converting employees to hourly and then reduce the base pay to offset the overtime and maintain the status quo. That certainly may work for some, but if other employers embrace the change and offer more pay, those who try to save on wage will lose good employees to employers who offer more competitive pay scales.
Business owners who are affected by the new law will have a choice to make; either convert employees who earn salaries between $23,660 and $47,500 to hourly employees and pay them overtime when they go beyond 40 hours a week, or raise the wages of those employees so that they make more than $47,500 in salary per year, and therefore aren't eligible for overtime. For employees who are converted to hourly and not given any more overtime, at least they will no longer be taken advantage of and in the process, their employers may finally realize how much free overtime they were receiving. That was the case for those of us in the legal field when twelve years ago the Department of Labor rules declared paralegals could no longer be paid on a salary basis. At first, this caused considerable angst and consternation for law firms and paralegals alike who thought this change would be devastating to their relative bottom line. As it turns out, I'm not sure it was, but certainly there was a silver lining for our profession. From my perspective, it caused attorneys to have a greater appreciation for the quality and quantity of work done by paralegals. When you have to pay overtime, you're more attentive to asking your employees to work long hours, late into the night. Certainly, these kinds of changes force employers to consider efficiencies, but also to consider the value of workers and the conditions of employment. This new rule can raise the bar not just for wages, but for working conditions.
Moreover, while this increase is without argument significant, many would argue that is only because it is so long overdue. Kimberly Weisul of INC. Magazine pointed out in her article entitled "why you're going to be paying a lot more overtime" that in 1975, 62% of salaried workers were eligible for overtime." Now, by comparison, only 7% of salaried workers are overtime eligible. That is not to say employees are not working overtime, because they are, they are just not getting paid for it at nearly the rate they used to.
A change of this magnitude all at once won't come easy. Indeed, officials from 21 states filed a lawsuit on September 20, 2016, claiming the rule to extend mandatory overtime pay would place an impermissible and heavy burden on state budgets. There is no doubt this rule will impact millions of workers and employers alike. According to the Department of Labor, the revision, strengthens existing overtime protections for 5.7 million additional white-collar salaried workers and 3.2 million salaried blue-collar workers." The fact is this rule will apply to nearly every businesses which employs lower earning employees in administrative or management positions. While the rule is only applicable to businesses with over $500,000 in revenue, or who's employees are involved in interstate commerce, it doesn't take much to qualify as a business involved in interstate commerce. Small business owners, and the hospitality and restaurant industries are expected to be among the hardest hit, but the Department of Labor is unapologetic and to the contrary, it has expressed confidence in the legality of its role and in the justification for its actions. In May of this year, when the DOL announced the new rule it proclaimed this was consistent with President Obama's goal of ensuring workers are paid "...a fair day's pay for a hard day's work." Vice President Joe Biden, speaking about the new rules in Columbus Ohio was also confident in its place in our future, predicting that the change would pump $12 billion into the economy over the next 10 years as better paid workers put their increased earnings right back into the economy.
No doubt, there will be growing pains with this change, but with it comes the opportunity for employers to audit their workforce, to improve their business practices and to give their workers a fair quality of life through better pay and fewer hours.