Last month, the Obama administration released its long-awaited update to the Fair Labor Standards Act’s (FLSA) overtime regulations. FLSA guarantees overtime pay of 1.5 times an employee’s regular wage for any time worked over 40 hours a week. The proposed rule would increase wages for 21.4 million workers by raising the overtime salary threshold to $50,440 -- an amount that is in line with the Obama administration’s “fair day’s pay for a fair day’s work” theme.
So what’s the background of all this and what is the potential impact of the change in rule?
Here are some details to help make sense of it all.
In 1938, FLSA was passed to guarantee a minimum wage (currently $7.25 an hour) and limit the number of hours an employee could work without overtime pay (40 hours in a workweek). However, FLSA also made executive, professional, and white collar employees ineligible for minimum wage and overtime pay if they made above a certain salary.
Today, the income threshold for white collar employees and professional employees is $23,660 ($455 a week). When this wage level was last adjusted in 2004, economists assumed that these employees made more than minimum wage and enjoyed other fringe job benefits, had better job security, and promotion opportunities that set them apart them from other employees, who were eligible to receive overtime pay because they made less than $23,660. Today, only 8 percent of salaried employees fall below this threshold and are overtime-eligible.
Due to the increasing cost of living since 2004, the Obama administration believes that there are white collar employees who currently don’t receive overtime pay - but should be - based upon their salaries and job duties. This is best exemplified by “managerial” employees that work alongside front line staff and subordinates, but who don’t enjoy the benefits that other professional executives, and administrative and salaried employees have.
Impacts of the Proposed Rule Change
It’s predicted that more than 21.4 million workers would benefit from higher salaries due to this rule change over the course of ten years, including 6.3 million salaried white collar workers. Additionally, the rule change is predicted to increase compliance costs for businesses by $255 million per year and increase employee earnings by at least $1.17 billion per year.
Impacts on Workers
• Employees who work less than 40 hours a week will probably be reclassified as overtime-eligible and be paid the same weekly rate.
• Employees who work over 40 hours a week could be (1)paid the current 1.5 times overtime premium; (2) have their regular rate of pay reduced so the total hours and earnings don’t change after overtime is paid; (3) have their overtime hours eliminated; or (4) have their salary increased above $50,440 to avoid overtime payment requirements.
• Employees who become overtime-eligible may work fewer hours because their wages would rise. The administration is touting this as a route to better work-life balance for the average employee (5.2 minutes less work on average per week), better health outcomes due to shorter working hours, and better productivity and output from lower employee turnover.
• On the fringes, this rule may also reduce the need for social services as lower-income salaried workers, who may now become eligible for overtime, gain more income and no longer depend upon federally-backed income support programs including Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP) – also known as food stamps, etc.
Each employer would make its own decision regarding these classifications based upon staff makeup, salary levels and potential reductions to profits.
Impacts on Employers
• Regulatory Familiarization Costs – This is the time and money employers spend to learn about the overtime regulation (this usually only happens in the first year of a new rule or regulation).
• Adjustment Costs – This is the time required to determine whether employees are eligible or not for overtime, to notify employees of policy changes, and update payroll systems.
• Managerial Costs – This is the time spent scheduling newly-classified overtime-eligible employees and closely monitoring their time sheets to avoid paying overtime.
• Lower Profits – Profits would be lower because higher employee salaries would be the result of transfers from profits to employee salaries.
• Lower Employee Turnover – Employees that earn more are less likely to leave their jobs. Across industries – and especially at lower incomes – higher earnings are strongly correlated with lower turnover.
Most importantly, employers that have lots of minimum wage workers, that work at least 40 hours per week, would be hit the hardest by this rule change. These employers cannot lower their wages any further. As a result, they would be forced to either layoff staff, reduce hours, or find some combination of the aforementioned solutions.
How will the expanding overtime eligibility affect your park and recreation agency?
Will this increase the amount of time you spend reviewing payroll, monitoring timesheets, or scheduling employees? Would you have to hire an additional employee or reduce current employees’ working hours? Will this increase your take-home pay? Allow you to take more time off?
Oliver Spurgeon III is NRPA's Manager of Government Affairs.