CNBC Explains

What the new overtime rules mean for me

President Barack Obama holds a shirt as he shops for clothing alongside store employee Susan Panariello, during a visit to a Gap clothing store in New York City, March 11, 2014.
Saul Loeb | AFP | Getty Images

President Barack Obama has announced plans to change the rules governing which employees are eligible for overtime pay, rules that last changed almost a decade ago. Supporters say the move will boost economic growth, but opponents warn of negative consequences. Here's why.

Who gets overtime pay now?

Under current rules, workers are not eligible for time-and-a-half pay when they work more than 40 hours if they are classified as "executive," "administrative" or "professional" and are paid more than $455 per week. That means a worker earning slightly less than $25,000 per year could work overtime and not be paid for those extra hours.

The rules were last changed during the George W. Bush administration, when the weekly pay limit was raised from $155 but also expanded the definition of which workers were exempt from overtime.

Who would be eligible for overtime pay under the new rule?

The number of workers likely to be affected by the rule change is unclear, since the administration has not announced how high it wants to raise the salary limit. But forecasts of the impact of a rule change are already proliferating.

The National Retail Federation, representing an industry that tends to employ a number of low-wage workers, predicted that the rule change would have a "significant job-killing effect."

Tammy McCutchen, a shareholder at Littler Mendelson and the former administrator of the wage and hours division of the Labor Department, is also skeptical. "I don't believe in Santa Claus," she said.

McCutchen was the lead Labor Department official when the overtime rules were last changed, and predicts that "there will be some businesses that are flush enough to keep people at their current salaries and pay overtime. More likely, however, they'll start limiting people's time."

Others are more optimistic. Ross Eisenbrey of the Economic Policy Institute predicts that if the new salary limit for overtime eligibility is raised to $50,000, some 10 million workers could be affected.

Is there any potential upside for the economy?

For those who believe a hike in wages is good for economic growth, yes. In fact, the planned rule change would be a way for Obama to encourage higher wages even if he is unable to push through Congress a hike in the minimum wage. Certainly he may get modified rules relatively soon. McCutchen predicts that "unless Republicans win the Senate back, we will have new regulations in 12 to 18 months."

If more workers start receiving overtime pay, the theory is that they would spend more, thereby spurring economic activity. Exactly how much more they might be paid, and how much they might spend, is unknown, since the administration has not yet specified the changes it is planning.

The share of gross domestic income paid to workers was at 42.6 percent in 2012, according to the Bureau of Economic Analysis, a record low since at least the 1940s.

What about potential risks?

Opponents of the overtime rule change have concerns echoing those about the proposed increase in the minimum wage, since the two would have parallel effects on employer spending on salaries and wages. House Speaker John Boehner on Wednesday warned that "the president's policies are making it difficult for employers to expand employment."

Marc Freedman, executive director of labor law policy for the U.S. Chamber of Commerce, said in a statement that "changing the rules for overtime eligibility will, just like increasing the minimum wage, make employees more expensive and will force employers to look for ways to cover these increased costs."

—By Kelley Holland, Special to Follow her on Twitter @KKelleyHolland.