The U.S. Department of Labor issued a new rule May 17 that could extend overtime pay eligibility to 4.2 million additional white-collar salaried workers nationwide, including many workers in the Katy area.
The rule, effective Dec. 1, changes the salary threshold for those who are exempt from receiving mandatory overtime pay. As it stands, full-time salaried workers making $23,660 or more per year do not qualify for overtime pay.
Under the new rule, that salary level will change to $47,476 or more per year. The change would affect about 370,000 employees in Texas, according to the DOL. Starting in January 2020, a new salary threshold increase will occur every three years.
The salary threshold is being raised based on the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region, currently the South, according to the DOL. The Highly Compensated Employees salary level is also being increased to the 90th percentile of full-time salaried workers nationally, which raises the level from the current $100,000 per year to $134,004 per year.
Those who have been studying the proposal’s implications say employers need to make decisions about how overtime-exempt employees will be paid.
“People are wondering, ‘What does this mean to me and what do I need to do?’” said Kevin Troutman, a Katy Area Chamber of Commerce board member and employment lawyer. “Companies have to decide, ‘Am I going to increase this person’s salary to go above the new threshold or am I going to reclassify this person and just pay them on an hourly basis?’”
The DOL argues the changes will help those workers receive fair compensation for their work.
In addition, employers would hire part-time workers to take over any excess hours their current full-time employees were working, said Ross Eisenbrey, Economic Policy Institute vice president and DOL expert.
On the other hand, the U.S. Chamber of Commerce predicts businesses—especially small and midsize ones—will struggle to absorb the increased labor and litigation costs.
“It does scare a number of businesses, and it should,” Troutman said. “This is one of the hottest areas of litigation in employment law. We continue to see increases in the numbers of lawsuits filed in these kinds of disputes.”
There are several concerns for businesses that could be affected by the proposal, including the affordability of paying people overtime, but also lower employee morale, Katy employment lawyer Elizabeth Pratt said.
One consequence of the law could be to minimize overtime, which means employees would have to track their hours.
“Now, you’ve got people who aren’t used to being monitored,” Pratt said.
She said in some situations, employers feel comfortable taking advantage of exempt employee’s availability and willingness to work, but upon taking a closer look at their hours, employers find that those long work schedules can be reduced.
Other issues, she said, stem from loss of a luxury of flexible scheduling and the symbolism of being exempt.
“I don’t know that all of the people currently classified as exempt are going to appreciate [being hourly]because a lot of people [who]are exempt see that as a form of status,” Pratt said.
Some companies might also have a hard time affording salary bumps or paying overtime if they do not reduce the number of hours exempt employees work in excess of 40 hours.
“I think anything that makes the change a little less drastic is probably better because drastic changes are just hard to digest in the workplace and in the marketplace,” Troutman said.
The rule does not include an exemption for small businesses or nonprofits. On the national scale, the National Retail Federation estimates the overtime changes would cost restaurants and retailers between $5 billion and $9 billion per year.
The DOL interviewed employer stakeholders before announcing the new eligibility threshold. In the report, some stakeholders said many employees value the time flexibility that comes with a salaried position.
The DOL reported one of the original intentions of implementing overtime pay is so employers hire more workers rather than requiring existing employees to work more hours.
The other intention is to prevent employees from being overworked and having negative health effects.
“If [employers]think that paying time and a half for overtime is too expensive, the answer is don’t do it. Don’t work people long hours,” Eisenbrey said. “It’s bad for their families; it’s bad for their productivity; it’s bad for their health. It’s a bad idea.”
In 2014, Obama signed a presidential memorandum directing the DOL to update its regulations that define which white collar workers are protected under the Fair Labor Standards Act’s overtime rules. The FLSA, which was passed in 1938, establishes overtime and minimum wage standards.
In response to the memorandum, the DOL sought to modernize and simplify its regulations.
“The basic rule [under the act]is that everybody is entitled to overtime,” Eisenbrey said. “The policy is that people shouldn’t work more than 40 hours a week. If they work over 40 hours a week, they should be paid extra. That discourages employers from working people long hours because they do have to pay extra.”