Last month, May 2016, the Department of Labor (DOL) issued final rules changing who will receive overtime pay for hours worked beyond the standard 40-hour workweek. Changes like these haven’t been made since 2004, and our country seems to be past due for an adjustment. In 1975, just one generation ago, 62% of workers in the U.S. were eligible for overtime pay. Now, in 2016, only 7% are eligible. Once the new rules take effect, 35% of U.S. workers are projected to be eligible for OT pay in 2017.
So you’re probably wondering, what exactly are the new rules? And how will I be affected?
Non-exempt vs. exempt
To make it simple, the main change in the overtime rules is the threshold that someone must be over to not have to get paid overtime. Until December 1, 2016, “non-exempt” employees are those who earn $455 a week ($23,660/year) or less, and employers must pay them at least the hourly minimum wage plus time and a half for all hours beyond forty. Employees who earn above this threshold and satisfy other requirements are “exempt” and are not required to be given overtime pay. However, this threshold will be lifted substantially in December; employees that earn $913 per week ($47,476 annually) or less will be required to be given overtime pay. For more details, check out the U.S. Department of Labor page on the Final Rule.
There are four different ways employers may choose to comply with the new rules. They will either have to:
1. Raise employees’ salaries to the new requirement
2. Reclassify the affected employees as non-exempt, convert their salary to an hourly wage, and pay them overtime for time worked beyond 40 hours/week
3. Limit workers to 40 hours and either get the necessary work done in that time or hire temporary staff or freelancers to make up the difference
4. Compensate for overtime pay by cutting base salaries or other benefits
How you may be affected
So first of all, you will only be affected if you earn less than the new requirement of $913 per week. Beyond that, how you will be affected depends on the way that your employer chooses to comply. Most likely, you will benefit. If your employer chooses option #1, your salary will increase. If he chooses option #2, your pay will increase because you’ll start getting paid overtime. With option #3, your pay will remain the same but you will not have to work overtime hours, improving your work-life balance.
While option #4 is the least ideal and seems unfair, it is technically legal. The government cannot regulate how much an employer pays its employees as long as they pay at least minimum wage. However, it is hard to lower someone’s pay when they aren’t being demoted, and employers will face a lot of turnover and resentment if they choose that route.
It will usually make more sense for employers to reclassify employees as non-exempt if their salaries are closer to the current minimum, especially if they rarely work overtime. However, when calculating the cost of raising employees’ salaries to the new minimum, bonuses, incentive payments and commissions will be taken into account; 10% of these payments can count towards the minimum requirement. For employees with salaries closer to the new threshold that consistently work overtime, chances are they will receive raises reaching just over $47,476.
Each business owner is going to have to weigh his options, determine what he is willing to do to comply with these new rules, and what consequences he is willing to face.
Some good things to know
- These rules will affect about 9% of the workforce (according to DOL). While the new regulations might be a little hard on some industries, they are not predicted to harm the economy as a whole. They should, however, benefit the lower end of the middle class. Many social programs aim to help even lower incomes, leaving the lower middle class close to poverty but not close enough to get help, making this arguably the best group to benefit.
- The pay threshold will be adjusted automatically every three years. This number is calculated by finding the 40th percentile salary for employees in the lowest-income Census region (currently the South). The purpose is to never let the threshold get unreasonable low and outdated ever again.
- Certain professions won’t qualify for overtime. Included are teachers, doctors, and lawyers.
- Employees in some states will benefit more than others. Although people will be affected in all 50 states, workers in the South are the most likely to benefit due to it being the lowest-income Census region. EPI calculates that over 30% of workers in Arkansas, West Virginia, and South Carolina will benefit.
- Millennials will benefit the most. Younger workers, ages 16-34, are estimated to account for 36% of the workers who will benefit from these new rules.