Here's a convenient way of getting more work out of your employees, without paying the required time-and-a-half pay for anything over 40 hours a week: Call them "managers." Currently, these so-called white collar workers are exempt from overtime if they make more than $455 a week or $23,660 per year, even if they perform routine tasks like stocking shelves at a convenience store. In fact, those small-time bosses don't even have to be paid anything more for the extra hours they put in to get the job done, not even minimum wage.
Monday night, President Obama announced that he wants to double that threshold, to $50,440 per year. The move would expand the number of people eligible for overtime from about 8 percent of the salaried workforce to about 40 percent, covering 5 million more workers, according to a fact sheet from the Department of Labor.
"That's good for workers who want fair pay, and it's good for business owners who are already paying their employees what they deserve -- since those who are doing right by their employees are undercut by competitors who aren't," Obama wrote in a Huffington Post op-ed announcing the decision.
Obama declared his intention to tweak the overtime exemption back in March of 2014, pointing out that the threshold for eligibility had fallen far behind inflation since it was initially set in 1975. Then, the rule meant that about 62 percent of salaried workers were eligible for overtime.
Over the past few months, progressives feared that he wouldn't raise the threshold high enough to make a real difference, and pushed back. In December, the left-leaning Economic Policy Institute -- whose former staffer Heidi Shierholz is now chief economist at the Department of Labor -- reported a "rumored" benchmark of $42,000 a year, and put together a letter from economists arguing for something no less than $50,000. Polling found that a larger majority of Americans favored allowing more people to earn overtime. Advocacy groups put out papers urging a stronger rule, and the New York Times editorialized to the same effect.
The number on which the White House settled, $970 per week, is the same as what EPI recommended -- since that's what it would have been if the 1975 standard had kept up with inflation in the first place. Going forward, the proposed rule would index the overtime threshold to incomes, rather than inflation. That would allow it to rise with the economy, although it might not necessarily keep up with the price of living.
Obama, who has implemented a number of his most consequential workplace policies through executive order, doesn't need congressional approval to pass the new overtime rule. However, it will have to go through a public comment period, and employers will have lots to say. They've already weighed in strongly, both publicly and via lobbyists, with House Republicans holding a whole hearing earlier this month to bash the idea. In particular, as a White Castle executive testified, the restaurant industry opposes increasing the amount of time an employee must spend on actual managerial duties -- rather than, say, taking orders or wiping tables -- in order to qualify as exempt from overtime. (The White House ended up not making that particular change in its proposal.)
So what effect would making more low-level managers eligible for overtime have on the labor market?
Well, if all salaried managers making between $455 and $970 per week suddenly became eligible for overtime, the change would disproportionately affect women, minorities, younger people, and the less educated. Here's EPI's breakdown of who would make what (using the slightly higher threshold of $984).
Even if employers did adjust to avoid paying overtime, proponents argue that putting a higher price on extra hours will incentivize companies to spread that work across those who don't have enough hours to make ends meet, which is a common complaint among restaurant and retail employees. Rather than boost managers' salaries all the way up to $50,440, companies might convert low-level managers to hourly pay, and they would at least make a little bit more in overtime. On the margins, they may have to hire new people, and absorb the cost through lower profits.
Employers, however, might choose a different course. Rather than just paying managers more for the extra time, a study commissioned by the National Retail Federation warned that employers would likely hire more part timers to do that work, and cut base pay and benefits to keep peoples' compensation the same overall. Meanwhile, companies might have to cut down on the number of managerial jobs they offer, making it more difficult for employees to climb the professional ranks and leading to more inequality in the workforce, not less. Nonetheless, even if they're able to avoid paying more for labor -- and there's evidence to suggest they won't be able to avoid it completely -- employers fret that the change would still cost them hundreds of millions of dollars to make the adjustment.
Now, if businesses think the Department of Labor didn't do enough to consider the economic impact of the new rule, they could try to block it in the courts -- or at least delay it, in hopes of running out the clock until a more sympathetic administration arrives in the White House. Alternatively, some experts think businesses might end up pushing to amend the Fair Labor Standards Act itself to block the new rule.
"It’s very difficult to stop a regulatory change, short of a statutory amendment," says Lee Schreter, co-chair of the wage and hour practice group at Littler Mendelson, where she has been counseling clients on the impending overhaul. "If the Labor Department reaches too far, perhaps you could see a coalition develop in Congress around certain changes."