On May 19th, the Department of Labor and the Obama administration finalized the details regarding the overtime reform bill that has been in the works since early 2014. Now we have some hard and fast specifics that are worth mentioning.
See our original article and infographic below for an in-depth explanation of the changes and estimated wage increases by industry.
- Overtime Reform Will be Active and Enforceable on December 1, 2016
- Wage Threshold Officially Set at $47,476 – Previously only speculated upon at around $50,000, the wage threshold has now officially been set at $47,476. Any salaried employee making less than that amount will have to be paid 1.5x normal wage for any additional hours per week exceeding 40.
- Automatic Adjustment Every 3 Years – Every 3 years, the threshold will be adjusted to keep the effective coverage rate of the US workforce at around 40%. According to current wage projections, that would mean the threshold will be increased to over $51,000 at its first adjustment on January 1, 2020. This is to avoid another major gap between reforms and ensure ongoing adjustment for inflation.
- Percent of US Workforce Affected Jumps from 7% to 35% – Once the new overtime rule takes affect, an estimated 4.2 million additional US workers will be eligible for overtime.
Click Here to see the White House’s official Fact Sheet.
What Obama’s Overtime Reform Proposal Means For Small Businesses
In early 2014, Obama signed an executive order that directed the Labor Department to overhaul the current overtime law. The biggest component of his proposed overtime reform is to require employers to pay overtime to their salaried workers who make $50,440 or less per year. Previously that amount was $23,360/year.
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So what does overtime reform mean for small businesses?
If Obama’s proposed overtime reform takes effect, then the percent of the workforce affected by overtime laws will jump from the current number of around 8%, to 40%. Exactly how much extra you’ll need to pay employees varies, of course, depending on the number of overtime hours, but the average increase would be roughly $2400 a year per employee.
Let’s break that down in-depth in infographic form:
Wage Increases Under Overtime Reform Proposal
The proposed overtime reform law only affects salaried employees that earn under $50,440. What it means is you’ll have to start paying 1.5x their hourly rate for any additional hours they work over 40 hours in a single week.
Public Radio International recently did an in-depth study, taking the Bureau of Labor Statistics most recent earning/work hour data and using it to calculate the effect that the new overtime reform legislation would have on each industry. We have condensed the data even further below to give an idea what to expect in various industries:
Top 3 Jobs with
1. Human Resources
Worker = $5877.82
2. Financial Specialists
1. Computer, Automated
Teller, and Office
2. Industrial and
Mechanics = $3530.28
and Repairers = $3502.07
1. Crane and
Inspectors = $4490.46
3. Flight Attendants
Sales and Related
Workers = $3779.10
services = $3697.20
3. Advertising Sales
Agents = $3673.80
1. Computer Support
Specialists = $2888.34
2. Clergy = $2864.42
3. Dental Hygienists
2. Water and Wastewater
Treatment Plant and
3. Chemical Processing
Machine Setters, Operators,
and Tenders = $2764.84
1. Pipelayers, Plumbers,
steamfitters = $2136.42
2. Electricians = $2066.22
3. Sheet Metal Workers
Workers = $1542.97
Jailers = $1233.70
1. Postal Service
2. Production Planning
Clerks = $435.24
*based on annual overtime hour estimates
There are 9 broad labor categories the Bureau of Labor Statistics uses for their surveys. We calculated the average increase in income for an employee in each industry category and also included the top 3 specific jobs within each industry that had the highest annual overtime wage. Of course, this is assuming the employee is salaried, works 40+ hours per week, and makes under $50,440. Also, this does not factor in any industry-specific numbers.
Other Interesting Facts
- Of the 9 industries studied (190 specific jobs spread throughout), the service industry had the most specific jobs affected (38) but also was one of the lowest in increased income ($896.6)
- Although the Management,Business, and Financial category had the fewest specific jobs affected when compared to other categories (10), it was also the hands down winner in estimated overtime wage increases ($5354.80)
- Transportation and Material Moving had the biggest variance between highest overtime wage and lowest within the industry, at $2697.24 (when comparing specific jobs surveyed within the industry)
- Office and Administrative Support had the lowest variance, at $300.04
So, What is Actually Changing?
How things currently work:
Under the 1975 (re-adjusted minimally in 2004) overtime law, any salaried worker that makes under $23,360/year must legally be paid overtime for any hours over 40 worked in a single week. But, if the yearly salary is over $23,360 and the employee performed any kind of “exempt” tasks (managerial/overseeing), then he/she was not eligible for overtime pay, regardless of how many hours were actually worked.
The Proposed Change
Under the new overtime legislation the “exempt” tasks remain unchanged (for those making over $50,440), but the wage threshold would be upped to $50,440 (similar salary as original but adjusted for inflation). This change would mean that the total percentage of the US workforce covered by the law would jump from 8% to 40%.
Okay, Okay, I Get That This Is a Big Deal. But, How Likely Is It To Actually Be Implemented?
To put it simply, Obama does not need congressional approval to implement the reform, which means Congress has no power to sideline the reform measures. Considering that this is one of the administration’s main focuses at the moment, the odds of the overtime reform being implemented are pretty high. There is still a chance that business lobbyists could legally sideline the bill or delay it indefinitely in court, but those odds are looking pretty slim.
So how soon would this take effect? Well, that depends. Obama’s goal is 2016. However, the reform still has to go through a public comment period, which is currently in-process. Also, it has to deal with business lobbyist litigation and any other legal matters that inevitably come up. By the way things are moving, it seems likely that the reform measures will be implemented in the next several years. Obama seems to view this as a capstone policy of his presidency, which makes him willing to fight for the sake of overtime reform.
Quit With The Numbers Already . . . What’s Going to Happen In Real Life? The Good, Bad, and Ugly
Now that all the technical discussion is out of the way, let’s talk about what effect this reform will have on small businesses.
The Good: Well, Not Really A Whole Lot of Positives for Small Business Owners
There are certainly some potential positives that could result from the reform from an employee perspective, including higher wages, less hours, and a more balanced lifestyle. But for the small business owner, the reform really does not introduce any actual business advantages. If you value hard work and a fair wage, then you will appreciate the legislation for the sake of salaried employees that are taken advantage of. But there are no provisions to award anything to business owners who treat their employees right. Instead, businesses get a general increase in overall costs across the board and an increase in government restrictions.
The Bad: Employee Limitations, Increased Cost, and Accountability to the Government
Although I think Obama’s heart is in the right place, the reality is that small business owners get the raw end of this deal. Here’s why.
1. Labor Limitations
There is one assumption buried within the reform bill that is rarely addressed. Namely, that there is never a situation in which a salaried employee would want to work overtime without getting paid extra. This seems like a no-brainer. I mean, who wants to work for “no pay”?
The assumption is an oversimplification, because there are a variety of situations in which an employee may be willing to work without overtime compensation. For example, some employees like their jobs but work for employers that simply cannot afford overtime pay. They willingly choose to forfeit overtime pay because they are content with their job and compensation. Second, there are those workers that are just looking to get ahead. They are willing to put in the extra hours of uncompensated time in order to further their careers, experience level, and traction within the company. Many of the employees with this kind of drive rise through the ranks and become top-level performers in their business, industry, or field.
The overtime reform bill really overlooks and restricts this kind of employee and employer choice, and does not account for how tight small business margins really are. As the NFIB points out in their official comments on the reform, small businesses owners really only have three choices. They can make sure an employee never works any more than 40 hours and pick up the extra slack themselves; cut an employee’s hourly pay to compensate for the extra hours they normally put in; or cut the employee’s pay enough so that they can afford to hire a part-time worker to pick up the slack. With business owners already struggling with time management, the two latter options are the most likely route for the small business owner. Either way, both the salaried employee and the employer lose.
2. Increased Cost
This is pretty self-explanatory. You might as well accept that you are going to have some increases in business cost. The NFIB estimates that overtime reform will cost small businesses at least $750 million dollars in new costs in its first year of implementation. Of course, as the NFIB points out, most of those costs will fall on the smallest businesses, as businesses with 50 employees or fewer generally spend 30% more on regulatory compliance than larger businesses do.
Either you pay your salaried employees more, which means increased cost, or you cut their salaries and hours and have part-timers pick up the slack. But that means more effort spent hiring, scheduling, and managing employees, which means increased cost. Also, there are the fees associated with the government checking in and making sure you are playing nice with employees. Not only will you have a higher cost, but you will probably have to charge more for your products and services, which means clients and customers will be paying a higher cost as well. Translation: More money, more money, more money.
3. Government Accountability
There is not a whole lot to be said here, other than that you will have yet another thing to keep track of for the government, in case they come sniffing around to make sure you are on-top of the new reform legislation. Whether it is more internal tracking of employee hours or yet another online filing of some sort, expect more paperwork and red-tape.
The Ugly: To Put It Bluntly, Some People Will Probably Be Out Of Work
The reality is that not every business will be able to retain all of their full time employees and pay them overtime once the reform takes effect. Either those employees will be moved to part time, which means a loss of benefits and probably salary, or they will have to be let go altogether.
It will be interesting to see how this all plays out and how quickly the overtime reform proposal is pushed through the courts and implemented across the country. Regardless, there is no doubt that there will be some significant changes in the small business labor landscape. Now that you have a general idea of what changes are taking place, you can start looking at your business and seeing what you need to address before the new reform legislation forces you to. Better to make changes now and be ready.
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