By Gemma Alexander
For the first time in 40
years, rules governing exemptions to the Fair Labor Standards Act have been
overhauled, and the impact could be significant. Beginning December 1, 2016,
the salary threshold for overtime eligibility will rise for all workers, regardless
of their job title. This could mean a raise for up to 4.2 million people—or
possibly, a demotion.
So how might the new rules
affect you?
What are the rules right now?
Under the current federal
rules, hourly employees are almost always eligible for overtime pay when they
work more than 40 hours in a given week. Salaried employees, however, are
rarely eligible.
Managerial and professional positions are traditionally
salaried, and those employees, the logic goes, are expected to work as long as
the job takes in exchange for additional flexibility and benefits packages.
The more hours of overtime a
salaried worker puts in, the less that worker costs the company per hour,
giving employers a strong financial incentive to classify employees as
“managers” (although in reality, their actual managerial responsibilities may
be minimal, or even non-existent).
Recognizing that many salaried
or seasonal positions, particularly in the retail and food service industries,
may not actually offer the supposed benefits of salaried positions, there is a minimum threshold for overtime exemption.
In 1975, the threshold was set at $8,060 and ensured that 62 percent of workers
were eligible for overtime. Last updated in 2004, the minimum salary that can
be classified as overtime exempt today is $23,660 and covers only about seven
percent of salaried employees.
At $23,660 per year, an
employee working full time makes $11.33 per hour.
Add five hours of weekly overtime, and the hourly rate drops to $10.08. Ten
hours of weekly overtime drops the pay rate to $9.07—less than minimum wage in eight states and the
District of Columbia. That sliding scale obviously incentivizes companies to
avoid paying overtime; in fact, Chipotle and several other
companies have faced lawsuits charging them with inflating job titles to deny
workers overtime eligibility.
What are the new rules?
Beginning in December,
salaried workers making less than $47,476—double the current limit—will be
entitled to overtime pay for any work over 40 hours per week. To skirt the new
limit, some critics are claiming that
employers will simply respond by cutting hours and hiring more employees, or by
reclassifying workers as hourly at the lower pay rate (hence, the
aforementioned demotions). While some employers are certain to try both of
these strategies, others will raise salaries to the new threshold.
However employers choose to
respond to the new rules, they will have six months to achieve compliance.
Although the new rules are largely a response to the perception of shadiness on
the part of large corporations, they apply to all workers, regardless of the
size of the employing company. Hence, small businesses may benefit from
professional financial and legal counseling to determine the best strategy
for complying with the new rules.
What will it mean for you?
According to White House estimates, 4.2 million employees will be affected by the
change, which could generate an extra $12 billion in wages. Salaried employees
should consider doing the following as the changes in December approach:
1.
Check with their HR departments to find out if their
position is affected.
2.
Do the math to figure out if
reclassification to hourly overtime-eligible status—or a salary bump to meet
the new exempt threshold—would result in higher actual pay.
3.
If necessary, advocate for the most beneficial pay
structure, and be prepared to take legal action if their employer
doesn’t meet the six-month deadline.
Although the new income cap is
the most attention-grabbing, other elements of the legislation may
have more long-term significance.
- Historically updated on
an ad hoc basis (and very infrequently), the income threshold will now be
updated automatically every three years. It will be maintained at the
40th percentile of full-time salaried workers in the lowest income
region of the country. It is expected to rise above $51,000 with the first
update on January 1, 2020.
- The “highly compensated
employee” threshold, over which only a minimal showing is needed to
demonstrate that an employee is not eligible for overtime, is also
rising—from $100,000 to $134,004.
- In a concession to opponents
to the changes, employers will now be able to count bonuses and
commissions toward as much as 10 percent of the salary threshold.
- The duties test to
determine eligibility for overtime will remain unchanged. This means that
an employee who is not in a professional or managerial position, but who
earns more than $47,476, will still be eligible for overtime.
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