How Obama’s New Overtime Pay Rules Will Benefit Salaried Middle Class Workers

obama-signing-overtime-pay-memorandum
obama-signing-overtime-pay-memorandum

The Obama Administration hopes to change the current status of overtime pay for employees.

Obama recently announced his plan to extend overtime pay to at least 4.2 million American workers, in an effort to help the middle class.

Via: HuffingtonPost

As of Tuesday night, the White House is officially rewriting the rules that determine who’s entitled to overtime pay when they work more than 40 hours in a week.

As the vice president might say, this is a BFD.

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The changes will make the rules more generous to workers, vastly growing the share of employees who have overtime rights under the law. The White House estimates they will extend overtime coverage to at least 4.2 million workers who are currently excluded. Other estimates put that number even higher.

Democrats predict these changes will give workers either bigger paychecks or more leisure time, helping restore middle-class jobs. Industry groups, meanwhile, are predicting armageddon.

You might be wondering: Will this BFD affect me?

That all depends.

The salary ‘threshold’

If you’re classified as an hourly employee, you should already qualify for overtime pay no matter what. It gets trickier for salaried workers. If you fall into that class, there are pretty much two factors that determine whether or not you’re guaranteed time-and-a-half pay when you work extra hours: how much money you make and what you do for your job.

The White House is changing the first part of that equation. It’s raising what’s known as the overtime salary threshold. The salary threshold is the number below which all workers have a right to overtime pay, regardless of their job duties.

Right now, the salary threshold is very low — just $23,660, as set by the George W. Bush administration. Don’t know many salaried workers who earn less than that, do you? That’s a big reason why so few workers currently qualify for overtime pay. Since the rules haven’t been updated often over the years, the White House estimates that just 7 percent of salaried workers are covered by overtime law, compared with 62 percent back in 1975.

On Dec. 1., the administration is going to roughly double the salary threshold, setting it at $47,476. That number isn’t random. The administration says they chose it because it represents the 40th percentile of salaries in the Southeast, which is the lowest-paying region in the United States. (They were originally looking to set it even higher, at $50,400, but walked it back about $3,000 after getting public comments on their proposal.)

The upshot: If you earn a salary between $23,660 and $47,476 and you weren’t entitled to overtime pay before, you will be entitled to it now. For the folks who were earning below $23,660 and were therefore already covered under the law, nothing will change.

The ‘duties test’

Your salary isn’t the only thing that determines whether or not you get overtime protections. Your job duties count, too.

If you earn above the salary threshold, your employer may be able to exclude you from overtime pay depending on what you spend your days doing. As we’ve reported before at HuffPost, a classic example is a retail store manager. Say you manage a dollar store, earning a salary in the mid-$30,000’s, working 60 hours a week and overseeing a team of two or three people. Since you were classified as a “manager” and since your pay cleared the previous low salary threshold, your employer could claim that you weren’t entitled to time-and-a-half pay on that 20 hours you worked beyond 40.

Managers aren’t the only exception to the overtime rules. There are also carveouts for executives, administrative employees and professionals, as well as computer analysts and sales workers, among others. (This fact sheet from the Labor Department explains the different exemptions.) There have been reams of lawsuits filed over these rules, with workers arguing in particular that they’ve been misclassified as managers so that their employers could avoid paying them overtime. These workers claim they are managers in name only.

When the White House says the new rules will guarantee overtime rights for 4.2 million new workers, they are talking about workers who fall between the old salary threshold and the new one and whose job duties clearly exempted them from overtime pay before. But there are many other workers — the Labor Department puts the number at 8.9 million — who also fall in that salary window, but whose eligibility wasn’t as clear-cut. Previously, these workers may or may not have been eligible for overtime, but they will be now for certain. The salary threshold draws what the Labor Department calls a “bright line” for workers earning less than $47,476.

Workers earning more than the new threshold won’t be automatically excluded from overtime protections. Again, it depends on their job duties and how their employers classify them. But it is more difficult for workers to prove their overtime eligibility if they are above the salary threshold. Many workers end up suing if they believe they’ve been improperly classified.

How this could play out for newly covered workers

Our minimum wage and overtime protections were passed during the labor strife of the Great Depression. The idea behind overtime was pretty simple: Keep workers from being underpaid and overworked. By mandating time-and-a-half pay for overtime, the government gives employers a choice. They can either limit employees’ work to 40 hours, or work them longer but pay a premium for it. (The law’s creators also hoped it could reduce unemployment and spread the work around. By making overtime more expensive, it could encourage employers to hire more workers instead of paying time-and-a-half to the ones they currently have.)\

If the rules play out like the administration hopes, workers will be getting paid extra money beyond their salary for the overtime they work, or they will be getting more leisure time because their bosses decide to limit their hours to 40 and avoid the premium. Either way, the White House figures, middle-class jobs will become more middle-class.

But employers are warning that nothing comes for free. They are calling the new rules a “career killer“ that will encourage them to reclassify salaried workers as hourly ones. That, they warn, will cost those workers their benefits and flexibility. Still others argue that the rules will prompt employers to lower base salaries in order to swallow the higher overtime costs.

Trade groups representing employers are enlisting Republicans in Congress to try to block the rule before it can take effect. That response shouldn’t come as a surprise. Our overtime law was meant to pose employers with a dilemma: Either keep workers’ hours in check or pay the price for it.  Many of them never had to face that choice — until now.