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October 24 2016

New Overtime Rules Will Have Unintended Consequences

Patrice L. Onwuka

The first day of December  can't come slow enough for many American employers who are scrambling to figure out how to avoid a financial blow when the Obama Administration’s new overtime rule kicks in.

In May, the Department of Labor announced a breathtaking doubling of the threshold for workers eligible to receive overtime. A change in the Fair Labor Standards Act makes employees who earn up $47,000 per year ($913 per week) eligible for extra pay when they work more than  40 hours a week. Currently, that salary threshold is just $23,000 per year ($455 per week). Some 4.2 million workers will be affected.

While many agreed it was time to update the rule, which hadn’t been changed 2004, they did not expect such a whopping increase or that it would kick in so quickly (in just seven months). It's conveniently coming in as President Obama is going out.

Businesses and nonprofits are essentially left with few options to avoid increasing overtime pay: change salaried workers to hourly and better monitor how much they work or lower their hourly rate to balance out how much they earn, or increase workers’ pay to above the new threshold. There’s also a less savory option as well: cut worker hours.

For many workers, this will mean doing the same work in fewer hours.

The Hill reports on some measures employers may take to comply with the new rules: 

Randy Bradley, who owns a Burger King franchise in Ottumwa, Iowa, and another in Kirksville, Mo., was also forced to convert some of his employees from salaried to hourly.

“I have eight managers who were salaried and five of those eight do not meet this new minimum because they more than doubled it,” he said. “I can’t afford to take everyone to that level.”

Wal-Mart went the opposite route, raising its pay for certain employees nationwide.

The retail giant gave all entry-level store managers a $3,000 raise on Sept. 3, bringing them up to $48,000 a year to keep them exempt from overtime pay.

Sushma Tripathi, vice president of strategic advisory services at ADP, said some companies are preparing to absorb a jump in labor costs.

Those who aren’t, she said, are taking drastic measures to keep costs neutral while still complying with the new regulation.

Some, for example, will convert salaried employees to hourly workers with a lower hourly pay rate that will balance out overtime hours worked. It’s legal, but Tripathi warns: Employers must make sure the new rate is over the minimum wage.

College and universities, which reportedly employ 3.9 million workers nationwide, are scrambling as well to sort out which salaried employees will get overtime pay as the Chronicle of Higher Education reports:

The rule change is likely to prove especially challenging for small, private colleges, already facing tight budgets, and campuses outside major urban areas, where living costs and salaries are lower and more employees may be affected.

They sent a letter to the Labor Department last summer when the rule change was announced explaining that the proposed $50,440 threshold was too high. Such a change would force them to reclassify their salaried workers to hourly or face labor cost increases in the tens of millions for large schools. That money has to come from somewhere and that would likely mean higher tuition costs or lower aid to needy students.

There is a fight in courts to halt this rule. Nearly two dozen states led by Texas are suing, claiming that the rule is too broad because it’s based on salary threshold and captures workers whose duties make them ineligible for overtime.

Undeterred, the Obama Administration and big unions like the AFL-CIO are cheering the impeding changes to the workforce, but most employers are not. Even worse, employers have just a few years before they have to figure out what to do again. The rule calls for an automatic increase in the threshold every three years beginning in 2020.

President Obama’s legacy will continue to harm on our economy for well into our future.

IIndependent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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