This month the Department of Labor announced a proposed rule change that will provide overtime pay to lower-salaried employees.
Currently, the Fair Labor Standards Act permits companies to exclude employees who are paid a salary of $455 a week or $23,660 annually from receiving overtime pay. The exemption applies to managers, administrators, sales employees, and learned and creative professionals. The federal exemption was enacted in 1975, when 65% of salaried workers fell below the current threshold. Today, only 12% of workers fall below the income threshold.
The new overtime rule increases the income threshold from $23,660 to $50,440 (or $970 a week). The liberal Economic Policy Institute estimates that nearly 6 million workers will qualify for overtime pay under the revised law. While this initiative aims to strengthen the middle class and address income inequality, the revision will impose significant burdens on employers.
Faced with higher payroll costs, employers will need to decide whether to pay time and a half to more eligible workers or hire more employees to cover the extra hours. The reclassification of millions of salaried employees to hourly employees may result in a loss of employee benefits, merit based bonuses, eligibility for paid vacation, and flexibility in setting hours. Additionally, while employers may pay increased wages to retain productive workers, those gains will be offset by businesses minimizing the hours of other workers and shifting workloads to higher-paid managers who are exempt from overtime. In sum, there may be unanticipated consequences that prevent the proposal from affecting the economy as desired. Still, there remains hope that the increased threshold, which will be indexed to rise over time, will improve the quality of life for millions of Americans.
The proposed law will undergo a public comment period until September 4, 2015. The Department of Labor will then hear testimony, review, and respond to the comments before finalizing the policy revisions. The revisions will require approval from the Office of Management and Budget (OBM), which usually takes 60 to 120 days for review. The new law should take effect by early 2016.
Allyson Matvey, a summer law clerk, assisted in the preparation of this article.