Making sense of overtime pay rule
An expert explains what happens after a plan to expand the number of workers who qualify is blocked.
About 4 million additional Americans were set to qualify for overtime pay under a new federal rule. But a federal judge has blocked the rule from going into effect Thursday as planned.
The change under the Fair Labor Standards Act would have doubled the annual salary threshold — to $47,476 from the current $23,660 — that generally determines who qualifies for overtime pay when they work more than 40 hours a week.
The rule also called for adjusting the threshold’s dollar amount every three years to keep pace with inflation.
But on Nov. 22, U.S. District Judge Amos Mazzant in Texas issued a preliminary injunction against the rule, essentially siding with a coalition of business groups and 21 states that contended the Obama administration overstepped its authority in issuing the new rule.
California was not among those states. But California has its own requirement that overtime be paid to salaried workers who earn less than $41,600 a year and allows them to claim overtime after working more than eight hours in a day.
Businesses nationwide had spent the last several months preparing for the new rule. But the judge’s decision has left them and their employees in limbo. The Labor Department said it’s reviewing its legal options.
(Hourly paid employees generally are eligible for overtime pay regardless of how much they earn per year.)
What happens next? We asked Jared Ashworth, assistant professor of economics at Pepperdine University, to explain. Here’s an edited excerpt:
Why did the Obama administration propose this new rule?
The current $23,660 threshold had not kept up with inflation, and so they wanted to lift it to a higher amount. The hope was to expand the protection for these millions of Americans. The goal was to increase the take-home pay for these workers.
Why did that idea run into opposition?
It would increase a firm’s overall costs, including compli-
ance costs. With the increased overtime regulation does come increased overhead. This would increase their expenses of having to deal with more regulation, more red tape, and it’s a fairly salient argument they have.
Is there an argument that this is not a federal matter but should be left to the states?
There’s a lot of evidence for why, if something like this is going to happen, it should be done at the state level. Look at California. California has a similar law, California is also one of the more progressive states in the union, and it’s one of the higher-cost places to live. Yet even with those things they still have an amount for overtime pay lower than what the federal regulation would have been.
If I’m an employer paying overtime, what do I do now?
One simple answer would be that it’s easier to ask for forgiveness than for permission, so you don’t make any changes until you get more clarification about what should happen.
But to the extent that you may have already started to implement some of these things, you may continue down that path. There obviously are a large number of expenses that happen when you have to change compensation and some firms may have already incurred all of those expenses. To the extent they found ways to do so and not impact their bottom line and potentially make their employees a little happier, they may continue to do that.
What are some of the ways they already might have adapted the proposed new rule?
If they have a worker making $35,000 a year and working 50 hours a week, under this new law they suddenly would have to start paying that worker more money for those last 10 hours a week. But they could just simply reduce the worker’s base compensation, so now instead of making $35,000 you’re going to be making X dollars less after this law goes into effect. They would have to pay you for all your overtime hours but your total compensation will not change.
There are definitely ways that firms ... could change their workers’ compensation to account for this overtime rule but still not change the final paycheck that the employee receives.
[Editor’s note: Other ways include raising a worker’s salary above the threshold to avoid paying any overtime, limiting workers to 40 hours a week or cutting jobs or freezing hiring to keep total labor costs unchanged.]
If I’m a salaried employee making between $23,660 and $47,476 a year, what can I expect?
I would expect to not to see much of a change for a while, especially with this ruling, and just wait it out. Do you expect the Labor Department to quickly appeal the judge’s decision?
I would suggest no. They’re going to have a new secretary of Labor in about two months. The appeal may be removed within two months by the Trump administration.
The benefit of appealing now would be that it puts some pressure on the incoming secretary of Labor to continue with that appeal, though I don’t know how much of that pressure they would actually feel.