The U.S. Department of Labor and the White House announced final publication of a rule change that would update overtime pay regulations for salaried workers under the Fair Labor Standards Act. (See TradePost July 9, 2015.) The effective date will be December 1, 2016.
The final rule will essentially double the salary threshold under which full-time salaried workers qualify for overtime pay. The change would allow those making less than $913 per week ($47,476 per year, less than the proposed rule's $50,440) to qualify for overtime. The previous maximum is $455 per week ($23,660 per year). To meet the new salary threshold, quarterly or more frequent bonuses, commissions, and incentive payments may satisfy up to 10% of the salary level.
In addition, the change provides for automatic future increases in the overtime pay threshold every three years, rising to $51,000 on Jan. 1, 2020. This provision is intended to protect workers from future inflation or other dynamics impacting pay rates.
The proposed rule change does not cover--and would not impact--the compensation requirements for hourly workers.
Currently, a two-part test determines overtime pay eligibility. In addition to having salaried compensation below the pay threshold, a worker must also hold a position outside what's generally known as "white collar" jobs. Employees performing executive, administrative or professional duties were not allowed to earn overtime pay based on what's called the "duties test." The final rule did not change the "duties test." The proposal was not part of a piece of legislation and did not need to be approved by Congress. Instead, it is similar to an executive order--a change coming from a cabinet department charged with carrying out the already expressed will of Congress.
Labor Department analysts believe the rule change will expand overtime eligibility to about 35 percent of the full-time salaried workforce, up from about 8 percent. They expect the change to translate into a total increase in pay of $1.2 billion annually.
The intent is to dial back the clock about 40 years when it comes to making salaried workers eligible for overtime. In 1975, 62 percent of full-time salaried workers qualified for overtime compensation in the event they worked more than 40 hours per week. (Of course, only a fraction of such workers actually earned overtime pay at any given time.)
Outside observers are not convinced the rule change will have the sweeping impact projected by the Labor Department. These analysts point out that employers are sure to make adjustments of their own to limit the overall increase in overtime payments to workers.
Employers could do so in several ways. They could shift some now salaried positions over to hourly compensation, a move that would likely leave impacted workers with less robust benefits and reduced schedule flexibility.
Employers could also reduce salaries to compensate for the increase in overtime pay or simply mandate that impacted employees not work more than 40 hours. They might also increase the salaries of people just under the threshold, making those workers ineligible for overtime.
The final rule has been met with sharply divided opinions. Proponents argue that a threshold update was long overdue. After all, they note, the previous threshold was below the poverty line, having remained the same since 1975. Advocates say the added income for millions of Americans will stimulate the economy, creating more jobs.
Opponents warn of unintended consequences including job losses, less flexible schedules for workers, and a loss of status and even some benefits for those becoming eligible for overtime.
Under the rule change, some observers believe impacted employees are likely to work fewer hours, creating a need for more part-time workers. In fact, a study by Oxford Economics found that if the salary threshold were raised to $808 a week (not the final rules $913), an estimated 117,000 part-time positions would be created.
In the months ahead, business leaders will need consider how this final rule will impact employees, labor costs and, ultimately, the overall mix of their workforces.
Readers, how will your company be affected by the new overtime rule change? Comment and let us know!