As we’ve shared before, in 2014, President Obama directed the Secretary of Labor to update the regulations related to overtime pay to “reflect the original intent of the Fair Labor Standards Act, and to simplify and modernize the rules so they’re easier for workers and businesses to understand and apply.” Yesterday, on May 17, 2016, the Department of Labor (DOL) issued a final rule.

UPDATE |  Scroll to the bottom of the page to learn about a judge’s ruling in 2016 that blocked changes in the law, preventing these rules from going into effect.

Background

Currently, workers who are paid by the hour receive “time-and-a-half” overtime pay if they work more than 40 hours a week or more than eight hours in one day. Salaried employees (those paid by the year) are not covered by overtime regulations. Such salaried employees can include a wide range of professionals, administrative workers and executives. (The term “exempt workers” is sometimes applied to this group, as they are exempt from coverage of overtime regulations.)

To keep companies from calling every employee an exempt worker, the law includes an exception for salaried workers whose salaries have been less than $455 a week, or $23,660 a year—they must be paid time-and-a-half for overtime.

In the final ruling, the DOL said that the earning threshold will be raised to $913/week ($47,476 per year). Increasing the exemption to that amount will expand time-and-a-half overtime pay to an additional 4.2 million workers, according to the DOL (see below).

The rule does not require congressional approval.

Download | A PDF of the final rule can be found here.

What the final rule will do

In its final rule (see PDF link above for full document), the DOL outlined what it will do, beginning December 1, 2016.

  • Raise the salary threshold indicating eligibility from $455/week to $913 ($47,476 per year).
  • Expand overtime pay to 4.2 million workers.
  • Automatically update the salary threshold every three years, based on wage growth over time, increasing predictability.
  • Strengthen overtime protections for salaried workers already entitled to overtime.
  • Provide greater clarity for workers and employers.
  • The final rule will become effective on December 1, 2016.
  • The final rule does not make any changes to the duties test for executive, administrative and professional employees.

Opposition to the rule

In an analysis issued last year, the National Retail Federation, an opponent of overtime eligibility expansion, predicted that employers will likely use a variety of strategies to reduce the additional labor costs in order to remain competitive.

Unintended consequences

Changes in regulations often result in unintended consequences. They serve as incentives for businesses to adjust their business model or practices in ways similar to a phenomenon in France called the “49-employee company.”

For example, expanding overtime coverage could prompt employers to reduce the number of hours that individual employees work, thus avoiding the requirement to pay them time-and-a-half.

Photo: Thinkstock

Update

What Should a Small Business Do Now That The Federal Overtime Rule Has Been Blocked?

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