President Barack Obama announced an expansion of eligibility for overtime pay to include over 4 million more workers.
The Labor Department changed its regulations so that white collar workers earning less than $47,476 a year will be paid overtime. The current limit is $23,660 a year.
Obama asked the department to change the rules in a memorandum signed in March 2014.
The change applies to executive, administrative, professional, and computer employees. It is not based on job description, but on what the employee primarily does.
Many manual laborers are entitled to overtime pay no matter how much they’re paid.
Overtime kicks in above 40 hours a week and comes with 50 percent bonus to the usual hourly pay.
“For generations, overtime protections have meant that an honest day’s work should get a fair day’s pay, and that’s helped American workers climb the ladder of success,” Obama stated in a May 17 letter to petitioners who supported the change.
But overtime coverage has shrunk over time.
In 1975, more than 60 percent of workers qualified for overtime pay based on their salaries. Today it’s just 7 percent, Obama wrote.
“This policy just hasn’t kept up with the times,” Obama wrote.
Obama made the rules to keep up with the times. Every three years (starting 2020) the overtime pay threshold will be adjusted “to equal the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region in the second quarter of the year preceding the update.”
That means it may be more or less in the future, based on the earnings of the specific workers in the lowest-wage Census Region (Northeast, Midwest, South, and West).
The National Small Business Association (NSBA), which advocates for small business owners, criticized the regulation change for placing additional administrative costs on small businesses.
“For small businesses, this proposal is just a transfer of funds from the business owner to employees, but with additional administrative expenses attached,” it stated in a September 2015 letter to the Labor Department, commenting on the original proposal of the rule change.
The labor department expects 4.2 million workers will see pay raise totaling about $1.2 billion a year. But it also predicts the change will cost employers almost $700 million in the first year and more than $200 million a year from then on.
Since the threshold was so low, and many businesses could classify all its employees as executive, professional, or administrative, many small businesses didn’t have to worry about counting work hours.
“Companies with fewer than 20 employees rarely have a dedicated HR department, so the creation of new hourly reporting and tracking requirements are likely to be a much greater burden on these companies that do not currently face them,” NSBA wrote.
NSBA predicts that businesses will slash work hours of their employees to 40 hours a week while cutting the salaries proportionately. That way they would avoid overtime pay, but would still have to track if their employees do actually work less than 40 hours.
The Labor Department suggests businesses can avoid the hassle by paying eligible white collar employees more than the threshold. But that may be a big step to make for companies in lower-wage areas.
“Small businesses everywhere will be affected, but most of the damage will occur in places where the cost of living and the wage scale is much lower than it is in Washington, D.C., or Manhattan, or San Francisco,” said Juanita Duggan, president and CEO of the National Federation of Independent Business.
“Many are struggling now, and they’ll have to make tough choices that might affect the very same workers whom the Department of Labor thinks it is helping,” she said.