Proposed Changes to Overtime Pay Looming on the Horizon

President Obama recently instructed the Department of Labor to revise the salary threshold for determining whether a worker is exempt from overtime pay. This threshold is currently $23,660 ($455/week), but Mr. Obama proposed a new level of $50,400 (about $970/week). That means that any employee who makes less than $50,400 would be eligible to receive overtime pay, with a few exceptions for certain types of professional positions.

Generally, hourly workers are eligible for overtime pay at one and a half times their normal hourly rate for any hours worked in excess of 40 per week. Some states and localities require a higher rate. In his remarks, the president estimated that this new ruling will affect nearly 5 million workers in 2016 who are currently exempt from overtime.

The salary threshold isn’t updated regularly for inflation, so supporters of Mr. Obama’s proposal argue that the new limit simply brings it up to date. The proposal includes a provision to index the new threshold to either price or wage growth in order to avoid that problem in the future.

This change has been coming for a while, so it’s likely some iteration of this proposal will take effect at the beginning of 2016. Once the proposed rule change has been published in the Federal Register for public comment, interested parties can submit comments at www.regulations.gov. According to Jared Bernstein, former chief economist to Vice President Biden and current senior fellow at the Center on Budget and Policy Priorities, this is a “rule change” which would not have to go through Congress for a vote, but instead would have the weight of an executive order.

What does this mean to employers?

Many of the types of jobs the new threshold will affect are in retail, food service and customer service. Some employers may choose to hire more individuals who will work fewer hours, meaning there will be more workers who make less pay. As with the recent shifts in employment due to the Affordable Care Act, it may mean more part-time workers. However, remember that adding workers can increase your costs for federal and state unemployment taxes and increase your administration and management burden.

Do the analysis: Take a look at your current employee list to determine whether you have employees exempt from overtime whose annual salary is less than $50,400 (if you’re a Mize Houser payroll client, run a User Defined Employee List and pick Employee Name and Pay Rate with a status of Active). Then make your plan.

We’ll keep you posted as this story unfolds, but remember the bottom line: You need to do what makes sense for your business.