This week, the Obama Administration announced that the Department of Labor is issuing a new rule that changes the eligibility threshold for overtime pay, making millions more workers eligible for time-and-a-half.
The Fair Labor Standards Act (FLSA) guarantees a minimum wage for up to 40 hours of work each week and requires employers to pay their employers one and one-half times their regular wage for hours they work above 40 in a workweek. There are several categories of employees who are exempt from these requirements, including a category of executive, administrative and professional employees. To be exempt from overtime, these employees generally must be paid on a salaried basis, perform specified kinds of executive, administrative or professional duties, and be paid a minimum salary per year. Currently the salary threshold is $23,660. This means, for example, that if someone in the administrative category is paid $23,661 per year, she will not be eligible for overtime pay if she has to work more than 40 hours per week.
In the first change to the salary threshold in over a decade, the new rule will increase the salary threshold to $47,476 per year. Currently only 7 percent of the workforce qualifies for overtime; under the new rule, 35 percent – or an additional 4.2 million workers – will be eligible. The U.S. Department of Labor estimates that this will increase workers’ wages by $12 billion over ten years. The new rule also requires that the salary threshold be updated every three years going forward, to account for inflation.
Proponents of this change argue that, under the current rule, many exempt employees who work 50-60 hours per week are actually being paid less than minimum wage. The change in the salary threshold means that employers will either have to pay these employees more (either as overtime or as an increase in their base salary) or stop requiring them to work so many hours each week.
Much of the business community is opposed to the change, citing the increased payroll costs. Some have also argued that the change will force businesses to crack down on flexible work arrangements, in order to make sure their employees aren’t working more than 40 hours per week. Others respond that flexible work schedules – which are particularly important to millennials – are unlikely to go away, and that many employees will be happier with clearer boundaries about how much they have to work.
To effectively manage the new overtime rule, employers will need to set clear expectations and policies about working overtime: when it’s allowed and how it should be recorded. Employers with non-exempt employees would be wise to have these common-sense measures in place already.
The new rule takes effect December 1.