Updated  | President Obama today announced a change in worker overtime eligibility regulations that will extend  overtime payment coverage to as many as 5 million workers as early as 2016. Unlike a raise in the federal minimum wage, these Department of Labor regulation changes do not require direct congressional approval.

Update | Department of Labor Issues Final Rule on Overtime Pay | 2016

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 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” are 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 are less than $455 a week, or $23,660 a year–they must be paid time-and-a-half for overtime.

In his announcement today, the President said that earning threshold will be raised to an estimated $50,400 next year (from $23,660). Increasing the exemption to that amount will expand time-and-a-half overtime pay to an additional five million or more workers.

By the numbers

• The overtime threshold has not been indexed to inflation and has been updated only once since 1975.
• It covers an estimated 12 percent of salaried workers (i.e., 88 percent of salaried workers earn above the threshold).
• According to supporters of the increase, boosting the threshold to $50,400 would bring it back in line with the 1975 threshold, after inflation.

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 to pay them time-and-a-half.

In an analysis issued earlier this 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.