More than 4 million workers will be eligible to earn overtime pay under new regulations set to be announced Wednesday by the Department of Labor, which is doubling the salary cap at which workers are exempt from overtime.
The new limit for salaried employees to earn overtime when working more than 40 hours a week will be $47,476 a year, up from $23,660.
The rule will take effect Dec. 1 and will be updated automatically every three years, indexed to salary growth.
“Today, in what was once a solidly middle-class job, a manager can be a single mother of three working 60 hours a week and still live below the poverty line, earning as little as $455 a week,” Labor Secretary Thomas Perez, said on a conference call. “The [overtime] exemption was intended to be a narrow exemption, applying only to highly paid workers with better benefits, more job security, and greater upward mobility, not to entry-level office workers or retail supervisors spending most of their day on a cash register.”
Business organizations have expressed concern about the higher cap, saying it could drive employers to cut benefits and make it difficult for workers to advance if a company cuts back on salaried positions. Many workers may not end up taking home any more money, according to the National Retail Federation, because employers will likely reduce pay or hours.
“These rules are a career killer,” David French, senior vice president for government relations at the Washington, D.C., trade association, said in a statement. “In the retail sector alone, hundreds of thousands of career professionals will lose their status as salaried employees and find themselves reclassified as hourly workers, depriving them of the workplace flexibility and other benefits they so highly value.”
When the overtime regulations were proposed last year, initially with a cap of $50,440 a year, White Castle, the Columbus, Ohio, fast-food chain, said that paying its general managers for time worked over 40 hours a week would increase costs by more than $8 million a year, and could affect how much the company can invest in health care, holiday bonuses, and profit-sharing.
Employees earning more than the salary cap will still have to pass the “duties test,” showing that they primarily perform administrative or executive tasks, to be overtime exempt, but for the first time, bonuses and incentives can count toward up to 10 percent of the new threshhold.
The higher salary cap will give 4.2 million additional workers the opportunity to earn overtime pay this year, according to the Labor Department. Many of them work in retail or food service, making the same paycheck regardless if they work 40 hours a week or 80. They often perform entry-level duties such as stocking shelves, mopping floors, and running cash registers but are ineligible for the overtime pay that hourly workers beside them can get.
In 1975, 62 percent of full-time salaried workers qualifed for overtime, according to the Labor Department, but because of inflation, today the share has dropped to 7 percent. Under the new rules, 35 percent of these workers will become overtime eligible.
“Businesses have become accustomed to working low-level salaried employees long hours for no extra compensation, but the pendulum has swung too far, and it’s time to restore some balance,” Ross Eisenbrey, vice president at the left-leaning Economic Policy Institute, said in testimony last week before the Senate Committee on Small Business and Entrepreneurship.
The new regulations could lead to increased litigation around overtime, said John McKelway, a partner in the labor and employment group at the Boston office of McCarter & English. Companies can deal with the new regulations in several ways, he said. They can increase salaries to the weekly cap, eliminating the requirement to pay overtime but resulting in an economic hit to the company, or keep salaries the same and control the amount of overtime employees work.
A third option is converting salaried employees to hourly workers, calculating a rate that takes into account overtime hours a person normally works. This is the most straightforward approach, McKelway said, but means tracking and compensating for “off the clock” work that people do at home.
Converting salaried employees to hourly can also be a psychological blow for managers who work long hours at relatively low-paying jobs.
“One of the things that really allows them to keep going and feel good about themselves is the fact that they view themselves as a manager, and once they start technically punching a clock, they feel diminished,” he said. “Rightly or wrongly, it is a blow to the employee’s self esteem, and that affects their morale, and that affects their productivity.”