Ryan Whitney
Managing Editor
Loyola University Chicago School of Law, JD 2017

 

Beginning in December of this year, the Department of Labor will implement their final update to the rules governing overtime pay. The new income threshold will nearly double, thus encompassing 4 million workers nationwide. This update will have a large impact on employers who will now have to get creative in order to comply with a vastly different salary structure for their employees and manage the inevitable increase in labor costs.

In the latest update from a 2014 Executive Order, the new overtime law sets the income level at the 40th percentile of the lowest-wage Census Region (The South). Workers making under $913 a week or $47,476 annually will fall under this overtime protection. This is a drastic leap from what was previously a $455 per week threshold. The rule also provides for wage updates every three years in an effort to calibrate wages with inflation and increase predictability. Finally, the rule allows employers to use non — discretionary bonuses to satisfy 10% of an employee’s salary.

The Obama Administration’s hope is that this will either force businesses to raise employee wages, or increase time employees have with their families when their hours are reduced. Employers worry about the rising costs of labor with such a hefty increase in overtime eligible employees. With the income threshold set to double, massive amounts of employees will now be eligible for overtime pay should their employers chose not to cut their hours. A state by state breakdown can be viewed here.

To be sure, this new rule does create winners and losers. The anticipated winners include employees whose employers can afford to pay them overtime, employees who live in a dual income household and prefer to work less hours, people in search of employment and the tech industry which has been pushing for automated systems to replace low skilled workers. The projected losers are primarily small businesses, employees who work over 40 hours but whose employers cannot afford to give them a raise and unskilled workers who are vulnerable to automated technological replacements.

The reasons for these distinctions between winners and losers lies in how employers will seek to comply with the new rule. The government suggests three options here but there remain various other routes an employer may elect to pursue depending on the nature of his/her business.

Option 1 is to pay employees who work overtime time and a half. This is a win for the employee but a financial loss on the business.

Option 2 is to raise the employee’s salary above $47,476. The same winners and losers as in Option 1.

Option 3 involves reducing employee hours to avoid overtime payment and hiring part-time workers to supplement the lost production. This is a win for employees who want to work less and have the means to do so. It is also a win for those in search of employment. However, it is a big loss to employees who are struggling financially and have now had their pay reduced in the form of reduced hours.

Option 4 includes replacing low-skilled employees with automated systems. A machine can work 100 hours a week and all the employer need pay is the upfront fee and occasionally maintenance and repair costs. This is a win for the employer but a loss for those employed, employees seeking advancement and those in search of employment. 

Option 5 involves implementing a bonus or incentive system to supplement 10% of an employee’s salary. The aim in this is to coax productivity out of employees to mitigate the losses a business will suffer when forced to pay for overtime work.

Option 6 would move to put all salaried employees under the $47,476 threshold on an hourly salary in order to track their work.

All of the above options can be mixed and matched to suit the needs and preferences of individual businesses. From a compliance perspective, payment policies can be implemented to reflect the various combination of options an employer chooses. Each compliance measure should be pursued in a way that is sensitive to the financial, ethical and expansion goals of a business or provider. While each business will differ in their approach, one theme is consistent: the entire burden created by the new regulation falls entirely upon employers to develop new payment models, create compliance policies, and bear the financial burden of doing so. They may even end up working overtime to do so.