Long-awaited updates to federal overtime laws are finally here. On March 7, the Department of Labor (DOL) proposed new changes to the overtime threshold exemptions under the Federal Labor Standards Act. This proposal — which is now taking public comment — calls for a higher overtime exemption threshold than exists now, but a lower one than the DOL called for under the Obama Administration.
Businesses have been waiting for a new proposal on overtime exemptions after bracing for changes proposed three years ago. The current law has been in place since 2004, and exempts employers from paying overtime to staff in white collar roles if they earn more than $23,660 per year, or $455 per week. In 2016, the Obama Administration proposed raising the exemption threshold to an annual salary of $47,476, which would make millions more Americans eligible for overtime. That law also mandated that the threshold be updated three years to account for inflation and other economic changes. Many business owners were displeased, and a Texas court prevented the law from being implemented.
After several years of debate, the Trump administration has released a more moderate proposal that would raise the overtime threshold to $35,308 in annual salary, or $679 per week. In addition, the new law calls for lawmakers to consider updates to the threshold every four years, but doesn’t make those updates mandatory as the Obama Administration proposal did. Read on to learn more about the new overtime proposals and what they could mean for your business.
The overtime law debate
The Federal Labor Standards Act standardized overtime pay in 1938, guaranteeing time-and-a-half wages when employees work more than 40 hours in a given week. However, the law also exempts businesses from paying overtime to certain employees based on their job description, pay rate, and how they get paid. Generally speaking, salaried white collar employees are overtime-exempt if their annual salary is above a specified threshold -- since 2004, that number has been $23,660.
Some economists have argued that the current threshold doesn’t account for the growth in cost-of-living over the last few years, and that employees originally intended to be covered by the law aren’t receiving the overtime pay they need. The Obama Administration set out to remedy this discrepancy by proposing a salary threshold increase to $47,476 a year, which would have made nearly 4 million American workers newly eligible for overtime pay.
That proposal hit a wall of pushback. Business owners protested that such a sudden leap would substantially hurt their bottom lines and backfire by forcing them to limit their employees’ hours. The Chamber of Commerce claimed that the increase would damage hiring rates, annual earned income, and employment benefits for most workers. Before the overtime increase could take effect, a federal judge in Texas blocked the law, stalling the process for the time being.
But now, the DOL under the Trump Administration has proposed an update of its own. This new law would raise the overtime exemption threshold from $23,660 to $35,308, a middle ground between the current rate and the proposed changes from 2016. Advocates of the new update hope that a smaller increase will prove more palatable to business owners, and allow a substantial number of American workers to start earning overtime without driving down hiring rates and available hours.
Critics, on the other hand, would say that an increase of this size doesn’t adequately address increases in cost-of-living. The Economic Policy Institute, for example, wrote in 2014 that the overtime threshold would need to reach $50,440 in order to make up for inflation that’s occurred since 1975.
Understanding the new law in action
Should the new law pass, changes could roll out some time in late 2019 or early 2020. Here’s a quick summary of what those changes would look like:
The overtime exemption salary threshold increases from $455 a week to $679 per week, or $23,660 to $35,308 annually. Remember, this threshold increase only applies to employees in white collar positions. Blue collar workers are generally still eligible for overtime regardless of their wage level.
The Department of Labor will be required to re-evaluate the threshold every four years, rather than change it automatically as proposed under the Obama Administration.
The Highly Compensated Employee (HCE) threshold will be raised from $100,000 a year to $147,414. This affects the restrictions on contributing to tax-deferred retirement plans.
Non-discretionary bonuses and commissions can satisfy up to 10% of annual salary.
How will these changes affect your bottom line? Businesses in areas like New York state that already mandate a high minimum weekly pay rate for salaried white collar workers won’t see much change. Companies who began preparing for the Obama-proposed law may also have an easier time acclimating, as the new exemption threshold is significantly lower.
Many businesses, however, will need to make difficult decisions about how they hire and schedule staff in order to preserve their bottom lines.
For example, let’s say a company has a white collar employee who makes $600 per week ($31,200 per year). Under the new law, she would now be eligible for overtime because she makes less than $679 per week. The business would need to decide if it’s more cost-effective to pay her time-and-a-half for overtime, or raise her weekly salary to $679 so that she remains exempt.
Let’s do the math for each scenario.
Scenario 1: The business gives the employee a raise beyond the overtime threshold.
In this case, the business would increase this employee’s weekly salary from $600 to $679 per week. She’s no longer eligible for overtime, but her increased salary would cost the business $4,108 per year.
Scenario 2: The business allows the employee to become eligible for overtime at her current salary.
Under this scenario, the business would have to pay the employee at 1.5x her hourly wage for every extra hour she works beyond the standard 40-hour work week. At $600 per week, her hourly wage works out to $15.00 per hour in a 40-hour work week, meaning her overtime rate would be $22.50 per hour.
At $22.50 per hour, the employee would make $4,108 in overtime pay if she worked 183 overtime hours over the course of a year, which works out to about 3.5 hours per week. The business should look at the employee’s schedule to determine the right move. If she generally works more than 43.5 hours per week now, the business should either keep her at her current salary and dial back her hours, or give her a raise so that she’s no longer eligible for overtime.
What to expect next
The Department of Labor will most likely have thousands — if not hundreds of thousands as they did in 2016 — submit comments on the proposed law. If discussions last into an election year, there is also the possibility that the law could be stalled once more. In the meantime, businesses can start getting ready by identifying which of their employees would be affected by the proposed changes.