The Obama administration’s new overtime rule was finalized Tuesday night, and it will go into effect in the nation’s workplaces on Dec. 1 of this year. I’ll get to the details in a moment, but this update of a vital labor standard is a great advance for working people. I’d go as far as to say that this may be the administration’s most significant action on behalf of middle-class paychecks.
Here are the basics of the final rule:
- The new salary threshold is $47,476, or $913 per week, just about double the current weekly threshold of $455.
To prevent abuse of the overtime law, which maintains that all hourly workers must be paid “time-and-a-half” (1.5 times their base hourly wage) for weekly hours worked beyond 40, employers can’t simply make someone exempt by paying them a salary. Salaried workers whose pay is below the OT threshold must also get OT pay. The new threshold represents the 40th percentile pay of full-time, salaried workers in the southern region of the United States. I know: why 40th, why southern, etc.?
A number of us who have been agitating for this change argued that the last time the threshold was consistent with the intent of the Fair Labor Standards Act (FLSA) was back in 1975, when it was a bit more than twice the current threshold (obviously, it wasn’t indexed to inflation or wage growth). The new threshold gets close to the 1975 level, adjusted for inflation, which corresponds to about the 40th percentile today.
But during the comment period, when the Department of Labor did its due diligence and listened to stakeholders on all sides of the change, it was suggested that the threshold should reflect regional wage and price differences. Instead of having a bunch of different thresholds, it decided on the 40th percentile of the lowest-wage region, i.e., the south. This took the threshold down from around $50,000 when the president first introduced the change to about $47,500.
- The new rule will directly affect 4.2 million workers. According to the Department of Labor, that’s the number of salaried workers newly eligible for overtime pay. That is, their salary stands between the current and the new threshold, between $455 and $913. Of course, not everyone in that range will end up working overtime — though about 20 percent regularly do so — but if they do, they’ll now be eligible for the OT premium.
- The Department of Labor believes the new rule will also indirectly affect 8.9 million workers. These are also workers who earn between the old and the new thresholds but the difference between them and the directly affected group is that these workers should already be getting overtime pay, but aren’t. The rules state that when someone’s duties at work are such that they’re not bona fide exempt workers, they should be covered by OT. These workers tend to not really manage or supervise other workers — they’re not recognizable as executives, professionals or administrators — and thus should be non-exempt. Now, because their pay is under the new threshold, there should be no more ambiguity about their coverage status.
That’s about 8.5 percent of employment, affected directly or indirectly.
- The new threshold will be adjusted every three years to the 40th percentile, full-time salary of the lowest paid region.
So how will this all play out in the real world? Some people who should have been getting overtime pay but weren’t, either because the threshold was allowed to stagnate or because their employers failed to correctly apply the “duties test” (admittedly ambiguous in some cases), will now get it. Others may work fewer overtime hours, but remember, they weren’t getting paid at all for those extra hours before, so they’re unquestionably better off (their weekly earnings would be unchanged, but they’d be working fewer weekly hours).
Some adjustments may come through lower base pay rates, such that an employer’s total wage bill, including OT, will be only slightly higher as they partially offset the impact of the increase through the lower wage. Others in the affected range may again end up exempt, but only after a salary bump up to the new threshold. And one impact I expect to see — one I’d argue is particularly welcome — is more hiring of straight-time workers by employers who want to avoid higher OT costs.
The Department of Labor estimates that the new rule will cost employers $1.5 billion a year: $1.2 billion in new OT pay and $300 million in administrative expenses to implement the change. In a nation with an annual aggregate wage bill of over $8 trillion, that’s about 0.03% of total pay.
In other words, what we have here is a progressive change that was a long time coming, one that will deliver a boost in pay to some workers and relief from unpaid overwork for others. It will transfer a relatively small amount of the nation’s wage bill from employers to workers, and in doing so, restore the purpose of a labor standard that is as important now as it was when it was first introduced in the 1930s.
Here’s how Labor Secretary Tom Perez, who was instrumental in bringing this rule to fruition, put it to me: “This rule is about ensuring middle-class jobs pay middle-class wages. The FLSA stands for the basic proposition that if you work full-time in America, you should be able to get by; and when you take on important responsibilities and work extra, you should be in the middle class. Today’s announcement will go a long way to restoring the luster of that crown jewel of worker protection. … overtime goes to the heart of what it means to be middle class. It stands for the idea that hard work should be rewarded, that if you work extra, you should get paid extra.”
Amen to that.
One final point. The reason this is happening is that it’s an executive rule change, not legislation. This Congress would never have taken a step like this to help middle-class, working families. But if the next president is hostile to the new rule, it can be reversed (it takes some time to do so, but it can be done). That means the fate of the new overtime rule is tied to the outcome of the election. Or, to put not too fine a point on it, from the perspective of the middle class, the electoral stakes just got even higher.
Jared Bernstein, a former chief economist to Vice President Biden, is a senior fellow at the Center on Budget and Policy Priorities