Obama Administration Is About To Help Millions Earn Overtime Pay

May 18, 2016

Millions more Americans are set to qualify for overtime pay under a final Labor Department regulation, in what could be President Barack Obama’s last big push to shore up workers’ wages.

 

The rule will increase the annual salary threshold that generally determines who qualifies for overtime pay when they log more than 40 hours a week. It will likely have a sweeping effect on workers, employers and industries, including retailers, the fast-food industry, universities and nonprofits.

 

The threshold will be doubled to $47,476 a year from $23,660, a level last updated in 2004, administration officials said Tuesday. That means workers who earn annual salaries of less than $47,476 will be eligible for overtime pay, while eligibility for those with salaries of that much or more will depend on their job duties. Workers who are paid hourly are generally eligible for overtime no matter how much they make annually.

Administration officials have said a sizable jump is needed because inflation has eroded the value of the current threshold, leaving too few eligible for added pay in an economy where wages have stagnated. The share of full-time workers who qualify for overtime pay based on their salaries has dropped to 7% today from 62% in 1975, they said.

The new level is a few thousand dollars less than the $50,440 regulators proposed last year. At that level, the Labor Department estimated 4.6 million workers would be newly eligible. On Tuesday, they said 4.2 million workers would newly qualify for the added pay, with 35% of full-time salaried workers expected to fall below the threshold under the new rule. They also said the rule is expected to boost wages for workers by $12 billion over the next 10 years.

The rule “goes to the heart of the defining issue of our time, that is restoring and expanding access to the middle class,” Vice President Joe Biden told reporters.

 

Companies will face a choice about how they implement the regulation, including paying their workers overtime or possibly capping their hours, Mr. Biden said. “Either way, the workers win” by either getting paid more or getting their time back to help raise their families or go to school, he said.

 

The administration also took the unprecedented step of ensuring the threshold will be updated automatically, every three years, by indexing it to salary growth in the lowest income region of the country. Also for the first time, the rule will allow bonuses and incentive payments to count toward up to 10% of the new salary level. The rule takes effect on Dec. 1.

 

Even the scaled-back threshold likely won’t satisfy employers who flooded the Labor Department with pleas to lower the amount more sharply. The agency received 270,000 public comments on its proposal, many from employers and industry groups who said the rule would force employers to cut workers’ hours, slow hiring of full-time employees and shift salaried workers to hourly employees who have to punch a clock.

 

“Just because there’s an overtime rule does not mean there’s going to be overtime pay,” said David French, senior vice president of government relations for the National Retail Federation trade group.

 

The group estimates the new threshold will affect about 2.2 million retail and restaurant workers, or 64% of salaried employees in the industry.

 

Some economists say not all those workers will receive larger paychecks.

 

Some employees will receive overtime and others will have their salaries lifted above the threshold, but still other workers may see their hours reduced. Employers could then hire lower-wage hourly workers to make up the slack, or shift work to salaried workers who earn above the threshold. Goldman Sachs economists estimated the rule would create about 120,000 new jobs in the year after it goes into effect. Those would likely be lower-wage hourly positions.

The Economic Policy Institute, a left-leaning think tank, said many more than five million workers could benefit. Its vice president, Ross Eisenbrey, said millions of salaried workers paid above the current threshold have been eligible for overtime pay, but didn’t get it due to complexities with exemption tests. A higher threshold would make clear who is eligible, he said. Labor Secretary Thomas Perez expressed a similar view on Tuesday.

 

“The overtime threshold is sort of a minimum wage for the middle class,” said Mr.

 

Eisenbrey.

 

The overtime rule is likely to change how businesses compensate employees. The Texas Roadhouse Inc. steak house chain tends to offer lower base salaries, but “a lot of incentive compensation,” President Scott Colosi told investors earlier this month. “It doesn’t sound like the Department of Labor is going to give us much credit for the incentive compensation that we pay.” 

 

Before knowing the specifics of the rule, he said bonuses could be reduced by 25% to 50%, so that base salaries for managers could be increased above the threshold.

 

Jeff Lawrence, Domino’s Pizza Inc.’s chief financial officer, said during a recent investor conference call that the company is going to have to see how the rule shakes out. The rule change is primarily “going to cause you to be far more efficient about not having overtime in your stores.”

 

Of the 2.2 million retail and restaurant workers the retail federation expects to be affected, it estimates about 104,000 whose pay is closest to the new likely threshold would see an increase in their base salaries by a total of nearly $159 million, or more than $1,500 for each worker. However, it expects those workers would also see an equivalent decrease in their benefits and bonuses.

 

Likewise, the group estimates hundreds of thousands of workers would be reclassified as hourly employees instead of salaried workers. Many could then have their hours cut to 38 hours a week in order for their employers to avoid paying them any overtime.

 

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