Will a Change in Overtime Law Change How Companies Do Business?

On March 13, President Obama signed an order to have the Department of Labor look into the state of overtime for salaried workers. Will this move benefit the economy, or will it just cause more problems for struggling companies?

Mar 17, 2014 at 11:02AM

On March 13, President Obama signed an order requiring the Department of Labor to look into the federal rules by which workers are paid overtime. This is the latest initiative in changing how Americans earn money, and adds to the ongoing debate on whether the federal minimum wage needs to be increased for all Americans.

As it currently stands, workers who work more than 40 hours per week are typically paid 1.5 times their normal wages for those extra hours. This doesn't apply to salaried workers in most cases, however; they only receive overtime pay if their salaried earnings fall under a certain level, which has been set at $455 per week since 2004.

Is it time for the rules to change so that lower-salaried workers earn more when working long hours? Or will the consequences of change be worse than the benefits?

Working overtime
The current rules regarding overtime were designed to keep high-earning salaried executives from getting an additional bonus once they crossed the 40-hour mark. The problem is that members of lower management may come in above the $455 per week level, even though they aren't making much more than that. This sets them up to work significantly more than 40 hours per week while only making around $24,000 per year without overtime pay.

While the $455 per week cutoff is significantly higher than the $250 cutoff that was in place before President Bush raised it, the lack of an update in the past 10 years has allowed the cutoff to fall out of sync with inflation. It also creates a situation that has the potential for abuse as companies could save money by switching members of lower management to salaried positions that pay just above the cutoff. In industries such as fast food, these lower-level salaried employees could then be used to control server and cook hours to prevent hourly employees from earning overtime as well.

Adjusting the cutoff
Once the Department of Labor has reviewed the cutoff, there is a decent chance that it will recommend a new adjustment to the rules concerning overtime pay. It's likely that the adjustment would be significant, similar to the Bush-era increase. It wouldn't be out of the question to see an increase to $600 or more, which would allow those earning under $31,200 per year to earn overtime pay while still preventing overtime for higher-level executives.

Assuming that theoretical increase to a $600 cutoff, a family of four that had a single income right at the cutoff would fall within 133% of the 2014 federal poverty level of $23,850 prior to the increase going into effect. Assuming that the worker didn't receive a raise that bumped him or her above the cutoff, the additional overtime pay earned during the year could not only take that family above the 133% mark but could quite likely move it above 150% as well. This could be significant, as those two points are often used as qualifiers for various types of aid.

Where will the money come from?
It's always important to consider how a change like this will affect not only the individual workers, but also the companies that employ them. Though a change to the cutoff for salaried overtime pay wouldn't have nearly the scope of an across-the-board increase to minimum wage, some companies could still see a significant increase in payroll due to lower-level salaried employees suddenly becoming eligible for overtime pay while working 40, 50, or even 60 hours per week.

How companies would react to this depends largely on the specific companies and how much free cash flow they have from operations. Some companies may just eat the increase, perhaps finding other ways to cut costs and even things out. Others may increase prices to increase overall revenue as a means of paying for the additional overtime. Of course, there are also companies that will likely give salaried employees close to the cutoff small raises to bump them out of eligibility prior to the new rules going into effect; the reasoning would be that it's better to pay out an increased salary now than to pay a larger amount in overtime once the rules change.

Will the rules be changed?
It's worth noting that President Obama's order only calls for the Department of Labor to look into the issue, not to actually make changes. While an eventual change is likely, it may not happen until later this year and may be included with legislation that makes other changes as well. An update to the Fair Labor Standards Act could be introduced that makes this adjustment in addition to an increase to minimum wage, though such legislation would likely result in a significant struggle to get it passed given the current polarization in Congress regarding the issue.

Eventually, the cutoff will most likely be raised. It's even likely that it will be raised during President Obama's term, since such an update is overdue. What remains to be seen is whether that raise will be enough to stimulate the economy or if it will just be another attempt that doesn't do enough to help the workers that actually need it.

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