Proposed New Overtime Rules

How They Affect Workers and Small Businesses

Proposed New Overtime Rules
July 10, 2022

Imagine that you are working more than forty hours a week for low pay, but you are not eligible for overtime because you are a manager. In fact, this situation is not at all theoretical to supervisors in low-wage environments such as fast food.

Department of Labor (DOL) regulations allow employers to submit salaried (non-hourly) workers to a "duties" test to determine how much of their job is managerial or administrative in nature. If the majority of your work falls into the former category, your employer can consider you exempt from overtime pay. Without that exemption, you would be entitled to time-and-a-half overtime pay.

The exemption does not apply to workers who make $23,660 per year ($455 per week) or less. Employees just above this threshold can be classified as managers and given enough managerial duties to qualify, even if the end result is very long workweeks without extra pay and an effective hourly salary that compares poorly to non-managerial status.

Labor advocates have been suggesting for years that the threshold for the exemption needs to be updated to take inflation into account. The threshold was last adjusted in 2004, but in terms of purchasing power, the threshold level has been effectively the same since 1975. Consider that in 1975, over 60% of salaried workers qualified for overtime pay, compared to less than 8% today.

President Obama recently announced a proposed change to the overtime salary threshold, raising it to $970 per week ($50,440 annually). Under the ruling, workers caught in the above scenario either would become eligible for overtime or would have to be given a pay raise to rise above the $50,440 threshold. In a Huffington Post blog discussing his plan, the president stated his reasoning, simply saying that, "Right now, too many Americans are working long days for less pay than they deserve."

The proposed rule will include some method of automatically raising the threshold in future years, either by connecting it to median pay amounts or inflation rates. DOL is completing work on the rule to be published in the Federal Register and subjected to a 60-day public comment period. A final version is expected to take effect in 2016.

The President has the authority through DOL to enact this rule without congressional action, so if Congress does not like it, they will have to pass legislation to counteract it. That may well happen, with business groups and conservatives panning the proposal — although in the election year of 2016, the rule is probably safe from adjustment.

Estimates vary on the effect. The National Retail Federation (NRF) claims that expanded overtime will have many detriments to businesses, ranging from higher costs to poorer customer service to blocking job creation. Meanwhile, Labor Secretary Thomas Perez suggested that the new rules could increase pay for lower income workers by up to $1.3 billion.

The Obama administration estimates between $240 million and $255 million in direct costs to businesses, while a study commissioned by NRF suggests $874 million is more likely.

Employers will likely compensate by shuffling hours around as much as possible and adjusting wage and bonus structures to compensate, so much of Secretary Perez's $1.2 billion-$1.3 billion estimate is unlikely to end up in workers’ pockets. A massive reclassification from salaried to hourly status is also possible, thus removing work flexibility and benefits associated with exempt workers.

The new rules may not accomplish what the administration expects, but it is hard to argue that the threshold, which fell below the federal poverty line for a family of four, did not need to be adjusted upward. Expect it to be enacted in 2016 regardless of the public comments.

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