A new federal overtime rule had many American companies scrambling at this time last year. The federal regulation, which was set to pass on Dec. 1, 2016, would have required businesses to begin paying overtime wages (1.5 times an employee’s hourly rate) to any full-time salaried employee earning less than $47,476.
This threshold previously had been more than twice as low, with companies owing overtime pay to employees with yearly salaries under $23,660. Then, after many employers had already responded to the regulation by offering raises and adjusting exemption statuses, a federal judge in late 2016 temporarily blocked the rule, halting its effects nationwide.
Less than a month ago, that same judge permanently struck down the Obama-era regulation, leaving the state of overtime pay in limbo. The increased threshold would have affected 4.2 million workers, according to the Department of Labor, so it’s clear this decision will have wide-reaching effects.
Here’s a breakdown of what we know.
Does the rule still stand a chance?
The short answer is no. While the federal government might have tried to fight the court’s ruling, that doesn’t seem to be the Trump administration’s intention.
A week after Judge Amos Mazzant — an Obama appointee on the U.S. District Court for the Eastern District of Texas —struck down the overtime rule, the Department of Justice announced that it was withdrawing its appeal, essentially agreeing to move on from the issue.
The Department of Labor has done the same. The agency reopened public comment on overtime rules and exemption requirements back in July, with the response period ending on Sept. 25. Suzanne Boy, an employment lawyer with the firm Henderson, Franklin, Starnes & Holt, based in Fort Myers, Florida, says this is an indication that the Obama rule has been defeated.
“For all intents and purposes, it’s dead,” she says.
What’s next for businesses and their employees
There were several ways in which employers responded to the rule. Some gave raises, but others cut hours. Some companies that had switched salaried employees to hourly pay to make them exempt from overtime eligibility changed them back, Boy says.
“I have actually not heard of any client that has taken a raise away as a result of this change,” she says.
Christa Hoskins, a 26-year-old graphic designer in Fort Myers, was given a $10,000 pay bump last year, partially due to the new overtime rule. She tells MagnifyMoney her employers are letting her keep the bump, even though the regulation was struck down.
“I received last year’s pay raise due to this rule possibly coming into play since my work anniversary so happened to be around the same time,” Hoskins says.
Boy says keeping the original $23,660 threshold could help some employees in the long run, because the proposed rule change would have forced many companies to cut costs at the expense of their lowest-earning workers. For example, many employees earning thousands of dollars under what would have been the new $47,476 threshold — such as $30,000 per year — might not have received raises. Instead, they could have seen their hours scaled back or their pay structures altered to help employers circumvent the new overtime policy.
“I think that it would not have been the saving grace that it was intended to be,” Boy says. “I think a lot of people wouldn’t have obtained the big raise that the rule was touted to be.”
The fact that the Department of Labor is asking for public comments means another new rule could be on the way, with the agency likely taking at least a few weeks to analyze and consider the responses.
Some people are concerned it isn’t enough. Steve Zieff, a San Francisco-based employment attorney with Rudy, Exelrod, Zieff & Lowe, says he thought the Obama administration’s threshold, while not necessarily high enough, was likely better than a potential new rule.
“I think even the current Department of Labor recognizes that the salary level is way too low,” says Zieff, who specializes in overtime pay for white-collar employees. “But I’m fearful they’re not going to raise it to a meaningful level.”
In a major blow to one of the last major regulations proposed by the Obama administration, a Texas federal judge has temporarily blocked the implementation of a rule that would have made 4.2 million workers eligible to receive time-and-a-half pay for overtime work.
The judge ruled on Tuesday in favor of a joint lawsuit filed by 21 states challenging the rule, which was set to take effect Dec. 1, arguing that the rule was imposed “without statutory authority”.
The rule would have required companies to pay overtime wages to non-exempt employees who earn less than $47,476 per year — double the current threshold of $23,660.
The fate of the overtime laws remains uncertain. The judge’s injunction precedes a final ruling on the law, but it suggests he will rule against it. President-Elect Donald Trump has been vociferously against heightened federal regulations and has vowed to impose new limits on how many new regulations can be implemented — for each regulation approved, at least two must be removed, he’s proposed.
Christa Hoskins received a whopping $10,000 salary increase for her three-year work anniversary, partially due to new federal overtime rules that take effect Dec. 1.
The 25-year-old’s salary as a graphic designer at Spiro & Associates, a marketing, advertising, and public relations firm in Fort Myers, Fla., now tops $47,476. The raise was based on merit but also came as Hoskins’ employers, like many others across the country, prepare to comply with new federal overtime rules.
Starting Dec. 1, companies must beginning paying overtime wages (1.5 times their hourly rate) to non-exempt employees who earn less than $47,476 per year — double the current threshold of $23,660. The new overtime protections could impact 4.2 million, or 35% of U.S. workers, according to the U.S. Department of Labor.
Hoskins, for one, isn’t complaining.
“This extra money going into my paycheck is very helpful, and will benefit those days where I work longer hours,” she says. “It would definitely help bring in more income as well as make up for the longer workdays.”
Other workers may not be as lucky. The new law has caused employers to pore over their staffs and budgets as they prepare to tackle the requirement to pay overtime to employees who previously didn’t require it. The strategies they are using to comply with the new rules vary. Some have chosen to give salaried workers pay raises, like Hoskins. Other employers have chosen to reduce worker hours and hire more part-time staff to avoid paying overtime.
Here are 5 ways the new rules could affect your paycheck, or your business’s bottom line.
1. Small businesses may pass higher labor costs on to their customers.
The new overtime rules have sent some small business owners into a panic over rising labor costs. Many small businesses are still reeling from the implementation of the small business mandate under the Affordable Care Act. The mandate, which went into effect in 2015, stipulated that certain employers with more than 50 full-time equivalent employees (working 30 or more hours a week) provide affordable health care coverage or face a penalty.
“I’ve heard a lot of doom and gloom speculation as to what this is going to do,” says Suzanne Boy, an employment law attorney with Henderson, Franklin, Starnes & Holt, in Fort Myers. “There is a frustration among a good number of small business owners as to how difficult it is to operate a small business these days with all of the regulation and everything they have to follow.”
For some businesses, the additional cost of salary bumps will be passed on to clients who use their services.
Christopher T. Spiro, founder and CEO of Spiro & Associates, says he is concerned the federal overtime rules and other costs, such as increased health insurance premiums, could “crush” a small business like his.
Spiro’s staff works long nights and weekends for some client projects and events, often working overtime. With the new overtime rules, a $30-an-hour employee could easily become a $45-an-hour employee during the week or a $60-an-hour employee on the weekend. He expects to have to pass the additional costs of labor onto his clients by charging more for their services, and he’s concerned clients may look elsewhere.
“So they’re going to be more inclined to go to an event company or a sole proprietor. So now this is causing me to lose business,” Spiro says.
2. Some salaried workers could see pay raises
Increasing salaries is one common way employers are navigating the new regulations. The new rules are more likely to impact salaried employees because they don’t work on an hourly basis. Offering raises is a way to avoid tracking the overtime hours required by the new law and keeps budgets manageable.
A little more than a year after Caroline Powell joined the customer service department at Athens, Ga.-based startup Seller Labs, she was surprised with a new title — director of customer service — and a 10% pay raise.
Brandon Checketts, founder of RoundSphere, the tech incubator that owns Seller Labs, acknowledged the overtime law’s role in his decision to give some workers raises but says it wasn’t the sole factor considered. Powell was one of a handful of workers who received raises of at least 7%, he said. Some increases took effect months before the Dec. 1 overtime changes.
For Checketts, the decision to opt for pay raises was intended to maintain company culture.
“All of our [salaried staff] don’t really keep track of time at all. So just to maintain that culture, we kind of pushed more people just above the threshold so that we don’t have to start [tracking hours for them],” Checketts says.
Pay raises have the dual effect of satisfying new overtime regulations and also boosting employee morale. “I felt super valued, which has been great,” Powell says.
Although Hoskins was thrilled to have a salary increase, she says her steadily increasing health care premiums put a damper the bump in pay.
“For me, if my health insurance didn’t go up so high, I would say, ‘Oh yeah, it’s perfectly fine, it’s in my raise now,’” she says. “[But] because [my premium’s] taking out such a huge chunk, that overtime would have been nice.”
3. Companies may begin hiring more part-time workers
In order to avoid pushing too many workers into overtime, some companies are hiring more part-timers to pick up the slack.
“Over the last year, we’ve basically hired people as hourly employees where we probably would have hired them in more of a [salaried] role previously,” says Checketts. “We’ve hired some people specifically as hourly, knowing [the new regulation] was coming.”
David J. Frohnen, president of Silver State Analytical Laboratories, a full-service analytical chemistry testing laboratory based in Las Vegas, Nev., says his company tends to hire recent four-year college graduates as non-exempt salaried employees.
He’s now considering hiring larger numbers of two-year college grads in full-time hourly technician roles. While they too would be subject to overtime pay, the larger number of hourly technicians could help reduce the overall amount of overtime hours that are accrued.
“We’re going to be spending time counting hours instead of helping our clients,” he says. “Culturally, that’s a real big shift for us.”
Spiro says his marketing firm also may use third-party vendors to do work that his staffers typically would do, to avoid costly overtime.
4. Salaried workers may start to clock in and out
To comply with the new overtime rules, some companies will now require salaried employees that fall below the exempt threshold to clock in and clock out in order to track overtime hours. This can be a tedious process and some business owners, like Checketts, have bristled at the idea of disrupting their company’s flexible work culture.
RoundSphere’s 55 employees work in the company’s Athens, Ga., office and also remotely. While RoundSphere has moved some non-exempt salaried employees into exempt status with the increase in pay, the company still has hourly workers who will fall under overtime rules.
“We don’t pay a lot of attention to hours. So obviously with the change, we do have to pay attention to hours,” Checketts says.
5. Companies may test out the ‘fluctuating workweek’
The “fluctuating workweek” is a strategy that employers don’t typically use often. The new rules could change that, Boy says.
Here’s how it works: An employer and employee agree up front that the employee will be paid a certain salary for a certain amount of hours. That will cover all the hours that they work, which can be 30 hours, 70 hours, or any number.
Then for any hours over 40, the employer is only obligated to pay a half-time rate, as opposed to a time-and-a-half rate, because all of the initial hours have been covered by the salary.
The benefit to the employer is that they have to pay less, Boy says, if an employee works above the agreed-upon hours. The benefit to the employee is that they’re still on a salary, instead of being converted to hourly employees, and they still get a bump (albeit a smaller one) in pay if they work extra hours.
The future of the overtime law
The National Federation of Independent Business, a small-business association, says the result of the new regulation could be less flexibility as well as smaller paychecks, if employers limit employee hours.
“We’re changing the culture of our company from a team atmosphere and get the job done for our clients and sharing the success of our company to one of put your time in … get your dollars,” says Frohnen, who is also a member of the National Federation of Independent Business.
He is supporting a bill proposed in Congress and following the status of a 23-state lawsuit led by Nevada’s attorney general, both of which could delay or roll back the rules. The Protecting Workplace Advancement and Opportunity Act proposes to nullify the new overtime rules and prohibit automatic increases to the salary threshold.
The bill, which has a version going through Senate and House committees, also would require the Labor Department to perform an economic analysis on the impact of mandatory overtime to small businesses, public employers, and nonprofit organizations.
“I still have a little bit of hope,” Frohnen says.