A recently passed Department of Labor regulation will entitle more than 4 million workers in the U.S. to overtime pay. USA Today reports that this is the “most sweeping action to fight income equality since President Barack Obama signed the Affordable Care Act into law.” Unlike Obamacare, however, the overtime pay regulation does not require approval from Congress.
In essence, the DoL’s Final Rule on overtime will allow President Obama to increase wages without increasing the minimum wage, which Congress has consistently blocked. The new rule doubles the threshold for both salaried and hourly workers who are eligible for overtime. Currently, only salaried workers who make less than $23,660 per year or $440 per week are eligible for overtime. The new rule raises this to $47,476 per year or $913 per week. Employees who make less than this must be paid time-and-a-half for overtime.
The threshold also will be updated every three years, rising to $51,000 on Jan. 1, 2020. Employers can also use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the new standard salary level.
For low-salaried workers, this is a welcome change. “Overtime pay has been slipping away from workers for years,” CNN Money reports. In 1975, 62% of the total salaried workforce in the U.S. were eligible for overtime pay. Today, a mere 7% are eligible. The new regulation will bump this to 35%.
Winners and Losers
The overtime regulation specifically helps salaried employees in food service and retail industries. Workers in these fields who have some managerial responsibilities, but relatively low salaries are not currently eligible for overtime when their work weeks exceed 40 hours. For example, a manager at a coffee shop may only make $35,000 per year, but work 50-hour weeks with no overtime compensation. That will change on December 1st.
Not everyone is happy about the Department of Labor’s Final Rule. According to CNN Money, the National Retail Federation, the Chamber of Commerce, and the Restaurant Association all fought the regulation. Small businesses are also wary of the effect that the increased labor expense will have on their bottom lines, and are instructing workers not to exceed the 40 hour work week. USA Today reports that this will create more part-time jobs.
Teachers, unfortunately, will not be eligible to receive overtime. Doctors and lawyers are also exempt from the overtime regulation. However, while the latter professions often pull in six-figures, teacher’s salaries are notoriously low.
How to Prepare
The ruling does not go into effect until December 1st of this year, so employers have some time to prepare. CFO.com discusses several ways to circumvent the regulation, by converting the status of eligible employees. Some businesses even plan to cut base pay to absorb the overtime expenses. However, organizations that are still struggling to retain their talent should proceed with caution. Here are three ways that employers can prepare for December:
- Pay time-and-a-half for overtime work in compliance with the new law. This is the path of least resistance, but could be the most cost-effective for employees who make considerably less than $47,476 per year.
- Increase the salaries of eligible workers. If your eligible employees make close $47,476 annually, then giving them a raise could actually save you money down the line.
- Limit workers’ hours to 40 per week. The simplest way to avoid compensating employees for overtime work is to not make them work overtime. Over-allocation of work is like the business influenza. When you give employees more work than they can reasonably do in a 40-hour work week, the increased stress levels can have a toxic effect on employee engagement, productivity, and — especially in the case of more senior staff — attrition rates.
While the Final Rule on overtime has the potential to negatively impact small businesses, and sadly does not extend to educators, it will improve the standard of living for the millions of people in the U.S. Make sure to prepare for it.