Moving to fatten low- and middle-income paychecks that have languished for years, the Obama administration on Tuesday unveiled a long-awaited rule that will make millions of Americans newly eligible for overtime pay.
While some businesses welcome the measure, many say it will simply force them to reshuffle salaries to get around the regulation. Others fear it will mean demoting white-collar workers and altering workplace cultures.
The rule, slated to be formally released Wednesday, would essentially double the threshold at which executive, administrative and professional employees are exempt from overtime pay to $47,476 from the current $23,660. That’s expected to make 4.2 million additional workers eligible to receive time-and-a-half wages for each hour they put in beyond 40 a week.
Labor Secretary Thomas Perez said the salary threshold was originally intended to exempt high-paid executives but instead has denied overtime to low-level retail supervisors and entry-level office workers who often toil 50 to 70 hours a week.
“Too few people are getting the overtime that (federal law) intended,” he told reporters. “It’s simply not right.”
Vice President Biden called the change a critical part of the White House’s goal of “restoring and expanding access to the middle class. The middle class is getting clobbered.”
The rule represents the administration's most prominent initiative to lift middle-class wages. President Obama's call to raise the federal minimum wage from $7.25 an hour to more than $10 has been stymied by Republicans in Congress. The share of full-time workers who qualify for overtime has fallen from 62% in 1975 to 7% today, according to the administration. The new rule, which would take effect Dec. 1, would allow 35% of workers to qualify.
Many companies expect to convert salaried workers to hourly employees who will need to punch a clock and track their hours, hurting morale in some cases. Some will likely maintain the status of salaried employees, but will still have to monitor their hours and net the extra pay for logging more than 40. Others will lift workers' base pay to the new threshold to avoid paying overtime.
Many small businesses can’t absorb the added cost and will instruct employees to work no more than 40 hours a week, bringing on part-time workers to pick up the slack, says Dan Bosch, head of regulatory policy for the National Federation of Independent Business. Perez said that will still be a plus because it will restore leisure time to overworked employees.
Yet some businesses plan to cut employees' base pay to offset the overtime, effectively skirting the requirement.
“The Obama rule puts a huge cost and regulatory burden on employers, who will face pressure to cut back on benefits and full-time employees,” says Trey Kovacs, policy analyst with the Competitive Enterprise Institute.
But U.S. Rep. Mark Takano, D-Calif., said it's “long overdue,” adding that “millions of employees are working long hours without fair compensation.”
The administration, which initially proposed the rule last summer, did make concessions in response to the 270,000 public comments it received. It lowered the new salary threshold to $47,476 from the proposed $50,544.
And it’s allowing employers to apply bonuses and incentive payments to up to 10% of the new salary threshold. The threshold also will be updated every three years instead of annually, rising to $51,000 on Jan. 1, 2020.
Perez said the new rule also clarifies the types of duties white-collar employees must perform to be exempt. That potentially makes eligible an additional 8.9 million workers now misclassified, he said, such as certain administrative employees who don’t supervise anyone.