Clocking in: How The New Overtime Law Will Affect You

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Title Clocking in: How The New Overtime Law Will Affect You
Author Catherine Kirby
Content status Published
Publication date
Notes Published as "Clocking in: Small Business and Overtime Regulation"
©, 2016

Clocking in: How the New Overtime Law Will Affect You

What is the new overtime regulation? On December 1, 2016, the Labor Department will officially institute new regulations on overtime pay eligibility for workers. Announced on May 17, the new rules require business owners to pay salary workers earning up to $47,476 a year time-and-a-half overtime pay when those workers work more than 40 hours during the week. In addition to the increase in the base salary, this new regulation will be updated every three years to adjust for average pay in the United States.

Federal employment law stipulates two different ways for employees to receive overtime pay. First, if the employee is not an executive or a professional with decision-making authority they are eligible. Second is a set salary level that determines whether the employee is able to receive overtime. If the salary of the employee is below a certain amount, that employee can receive overtime pay.

While the Labor Department calculated that the new law will affect 4.2 million workers, the Economic Policy Institute estimates that this new regulation will affect 12.5 million employees, 23% of salaried workers. The institute expects these new rules to affect over one million Texans.

The new overtime rule will apply to any business that is subject to the Fair Labor Standards Act. This includes any business with sales of at least $500,000, or employers involved in interstate commerce. The National Federation of Independent Businesses says that the requirements will affect around 44% of US business with fewer than 500 employees.

History of Overtime Pay Regulations The 1938 law that began federal minimum wage also started the overtime rule. While the government has raised the overtime pay salary cut off several times over the years, the current cutoff is at $23,660. Vice President Biden noted that that more than 60 percent of salaried workers qualified for overtime in 1975 based on their salaries, but only 7 percent do today.

Complying to Regulations To comply to these new regulations, employers will have to track employees work hours, even those of salaried employees. This change can involve costly adjustments as employers may have to buy new systems to track employee hours. Additionally, employers may have to change the way they manage their labor budget. Failure to comply can result in wage-and-hour lawsuits or penalties.

Employers will most likely respond in a couple of ways. Some employers will choose to limit their employees time at work to avoid paying overtime. Others may hire additional workers after limiting hours of their other employees. Additionally, employers could also raise the pay of employees whose salaries are close to the cutoff to avoid paying overtime work. Employers also have the option to cut salaries of workers with the hope that overtime will make up the difference in income.

Oxford Economics predicted that a “disproportionate number[s] of workers” [that] became eligible for overtime and worked more than 40 hours would see their hourly rates decreased by an equal amount, leaving their total annual earnings unchanged.” On the other hand, the Institute for the Study of Labor, said that base wages would fall somewhat over time, but that the higher overtime payments would more than offset any loss in regular salary levels.

Positive Aspects of the New Regulations The new regulations can potentially have positive effects on the labor force. Goldman Sachs and the Economic Policy Institute estimate that the new regulations will create about 120,000 jobs. Additionally, others feel that it is only right for employees to earn overtime for working over 40 hours. Vice President Biden and other supporters of the change present the idea of fairness as the main positive aspect of the new regulation. The government hopes that the rule change will give middle class families additional income. Others state that the new regulations offer the opportunity for employers to re-examine the classification of their workers, something that could change the way they deal with the new rule.

Negative Aspects of the New Law Despite the potential for positive effects, the new regulations could bring numerous negative consequences for employers including, increased burden for tracking hours and increased payroll expense. The new regulations will immediately require employers to keep track of employee attendance and hours. This tracking can have a negative effect on small businesses due to high implementation expenses. Payroll reclassification for small businesses can also be time consuming and expensive. Business owners must figure out whether their workers are exempt from the new requirements. Misclassification can result in lawsuits and penalties.

All of these changes can be costly for small businesses to implement. A study commissioned by the National Retail Federation estimated employers could end up having to pay as much as $874 million to update payroll systems, convert salaried employees to hourly wages, and track their hours. The potential costs have not gone unnoticed, and the National Federation of Independent Businesses filed a petition to delay the implementation of these new rules

This new measure can even hurt employees by giving workers less flexibility, hour cuts, and decreased morale. Worker flexibility can also decrease, hurting employees. Salaried employees often enjoy flexibility in working hours that can allow them a certain amount of freedom. Now flexibility can be expensive if they are required to record every hour of their work. This measure can decrease the morale of employees as many enjoy the idea of being on a salary. Employees also run the risk that their employers will cut their hours to avoid paying overtime. Jobs may be created by this regulation, but those new jobs could come from cutting a full time job in half to avoid paying overtime. Workers may have difficulty finding full-time employment

Room for Improvement? These new regulations disproportionately hurt small businesses. It is important to respect the rights of workers to earn more money for overtime. However, the government must find a solution to help low income workers without imposing a burden on small business owners. One solution would be to institute this new regulation in phases. The overtime income cutoff change from $23,660 to $47,476 is a huge difference. The government could implement the new regulation in smaller phased increments similar to the way that minimum wage increases. The government could also consider lowering taxes for middle and lower class individuals and small businesses.

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