On Wednesday, May 18, 2016, the US Labor Department issued its final rule on overtime compensation, significantly raising the threshold over which certain salaried workers will become eligible for time-and-a-half wages for overtime. This rule change is connected to the Fair Labor Standards Act and was instigated by President Obama in 2014. It sets the salary limit at $47,476 per year, which is the equivalent of the 40th percentile of salaries in the nation’s lowest income region. The new rule also will implement a built in tool to adjust the salary limit every three years to keep up with current wage standards. Not all salaried employees whose annual income is at or below the new level will be eligible to earn overtime wages, however. Exemptions for certain classes of employees, notably including doctors and teachers, continue to exist. The rules changed for Highly Compensated Employees, as well, but the greatest impact will be felt for workers in the middle class.
Federal regulation of overtime wage standards relates back to the 1938 minimum wage law, which set a nationwide standard designed to protect workers and ensure that they would be able to earn what was then a very conservative living wage. American wages have not followed the same growth trajectory as has the cost of living, and minimum wage no longer translates to a living wage – although there have been recent legislative movements to bridge that gap at least on a local level.
The last adjustment to the Labor Department’s overtime rule was in 2004, and the wage level set then was $23,660. Wednesday’s change will mean that an estimated 4.2 million workers will now become eligible for overtime pay, and around 9 million already-eligible workers will now have legal protection to prevent the denial of overtime wages based on a duties test (ie, if the employee were deemed to be a professional with broad decision making authority). This hard-line salary level rule removes the objectiveness of a duties test, leaving no question about whether an employee qualifies. Even with this new rule, fewer middle class workers will qualify for overtime (7%) than they would have by 1975 standards (60%) when adjusted for inflation (that wage figure would exceed $50,000 annually).
The practical implications of this final rule could have a negative impact on some workers, however. Employers may either increase an employee’s base salary slightly above the limit in order to avoid having to pay overtime, or to avoid hiring additional staff to meet work demand. Employers argue that this new rule is costly to implement, and that it will also be damaging to worker morale as employees feel the need to justify their working hours.
The increase in overall earnings of these newly-eligible workers will be a boost to the economy. As these qualifying employees have higher earnings, they will be able to pay down debt and also have greater discretionary spending dollars. When those dollars are spent, they generate income within communities, and account for significant increases in tax revenues. This action by the Labor Department is an important step toward bolstering the strength of the middle class.
If you’d like to read the Office of Management and Budget’s approved final version of the rule (still subject to minor changes before publication in the Federal Register), you can follow this link.