Overtime Pay Expands to More Salaried Employees

Beginning December 1st of this year salaried employees who make less than $47,476 a year will become eligible to recieve overtime pay (time and a half) when they work more than 40 hours in a given week. Prior to the new rule announced by the White House this past week that salary bar had been set at $23,660. While Vice President Joe Biden heralded the move as “restoring and expanding access to the middle class,” many employers — especially those in industries such as retail and fast food — were vehemently opposed to the changes saying that it’s too drastic of a jump.

According to CNN Money the number of salaried workers who were eligible for overtime has fallen from 62% in 1975 to a mere 7% today. With this adjustment that figure is anticipated to jump up to 35%. Additionally the new rules will make it so the threshold will continue to be adjusted every three years. Estimates suggest that could mean a $51,000 salary cutoff by 2020.

When calculating whether an employee is eligible for overtime pay, bonuses can also be factored into their annual compensation. However, in that scenario, the bonuses cannot make up more than 10% of their total salary. For example an employee whose base salary is $45,000 but makes $4,500 in various bonuses would be exempt from overtime pay since their effectively making $49,500 a year.

Projected Impact

Over the next decade the Labor Department estimates that this rule change will result in $12 billion in pay for workers. That may be good news for them but it could mean lean times for many major retailers who are already combating minimum wage hikes in certain parts of the country, not to mention the wave of poor earnings the sector has experienced in recent weeks. Of course it’s not only these large corporations that are taking a hit but many small businesses as well.

There are a number of ways that businesses may react in order to get around or comply with these new rules. The first is that some employers may choose to raise their lower salaried employees up so they are above the new threshold. Another relatively positive scenario for employees would be if businesses simply capped their hours at 40 to prevent overtime. However the new law doesn’t do anything to prohibit employers from lowering the base hourly wage for salaried employees to counteract the overtime pay they’ll receive. In this case workers would work the same amount of hours (more than 40) for the same net pay. Despite that technically being possible, Labor Secretary Thomas Perez says he’s confident that this will not be the approach that many employers take saying, “You don’t respond to any employee by lowering their wages. But it’s particularly imprudent to do so with folks who are running the place. It’s inconsistent with rational behavior.”

Like the Fight for $15, it will be interesting to see how this new rule and the debate around it develops in the coming months or even years. While Perez is likely correct in stating that the majority of employers will comply with the change as intended it still raises the question of who will ultimately end up paying for the additional payroll. Some speculate the rule could adversely affect part-time and hourly employees who may see bonuses or other benefits cuts as a result, while others suspect that a round of price increases for retailers and restaurants could now be on the horizon. If nothing else you can certainly expect this to be yet another hot button issue as we head into what is already a heated presidential election season.

Also published on Medium.


Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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