New Overtime Rules Could Affect Four Million Americans

On May 17, President Barack Obama and Labor Secretary Tom Perez announced significant changes as to how employers will determine who is eligible for overtime pay in the future. The regulatory changes are to the Fair Labor Standards Act of 1938 and lift the salary threshold used as part of a two-fold overtime eligibility determination from $23,660 to $47,476 a year. According to the administration, this change will affect 4.2 million employees and increase payrolls $1.2 billion annually.

The Fair Labor Standards Act of 1938, or FLSA, is the Depression-era legislation that established the eight-hour work day, 40-hour work week, and time-and-a-half pay for overtime, as well as strict child labor rules. These changes impact the regulations that determine who is, and who is not, eligible for overtime pay. 

It has been a long time since changes have been made to these regulations. The FLSA’s last comprehensive regulatory overhaul was completed during the Ford administration with further reforms implemented under President George W. Bush. Those reforms excluded many lower-level supervisors from eligibility while including some additional administrative staff. In written press releases, fact sheets and interviews with Perez, the administration has presented the regulatory measures as a necessary “update” to fulfill the original intent of the FLSA to protect workers’ time and ensure fair compensation.

Effective Jan. 1, 2017, most employees, including those on salary, earning less than $47,476 will be eligible for overtime pay, up from the current salaried eligibility limit of $23,660. In an email to supporters, Obama argued the need for changes to how the FLSA is implemented.

“Today, just 7 percent of workers qualify for overtime pay based on their salaries,” Obama said. “Compare that with 1975, when more than 60 percent of workers qualified for overtime pay based on their salaries. This policy just hasn’t kept up with the times.”

The new regulations do not mandate a salary number, instead opting for a formula that will automatically update the salary eligibility every three years—unless changed by future legislation or rule change. The regulations set the salary threshold at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region. Currently that region is the South, with weekly earnings of $913 or $47,476 annually. By tying the salary requirement to the prevailing wage in the lowest paying region, the administration hopes to prevent the rule from being undermined by inflation and inaction.

In preparation for the rule change, a Notice of Proposed Rule Making was issued in July 2015 and received more than 270,000 comments during the public comment period. In response to the notice, Gov. Terry Branstad of Iowa wrote to Perez highlighting the impact the proposed rule would have on Iowa’s budget. The governor’s office estimated the rule, if implemented as originally proposed, could increase state employee and state university payrolls by $19.1 million.
“Quite simply, (U.S. Department of Labor’s) proposed rule would be an unfunded mandate upon states,” Branstad wrote in the letter. “Since a majority of state leaders have no interest in growing the size and cost of state government, USDOL’s imposed cost increase will displace other priorities—from education to economic development to water quality to workforce development to improving health outcomes.”

Similar arguments have been made about the rules’ impact on the private sector. Research group Oxford Economics studied the potential impact of the proposed rules and found that rather than raise middle class incomes, the changes could result in lowered base salaries and decreased hours. The study, commissioned by the National Retail Federation, used a $970 weekly salary threshold for analysis. Other opponents have argued that the changes could cause a negative impact to employee morale and satisfaction by requiring salaried workers below $47,476 to keep track of their time in order to comply with and receive new overtime benefits.

While the regulations are subject to a congressional review, Congress has only voided a rule once since 1996. With the new regulations expected to come into effect Jan. 1, 2017, states and businesses will have to examine and weigh the costs of overtime, additional staff, reductions in salary, or raises above the threshold as options for compliance.