New overtime rules may have limited impact

  • Millions of workers could now be eligible for time and a half
  • But White House bid to boost paychecks depends on employers' response

Millions more American workers are about to become eligible for overtime wages in their weekly paychecks. But it's far from clear just how many of them will actually get a raise.

The change comes as President Barack Obama is proposing to boost the salary threshold for workers who can be "exempt" from overtime, the latest effort by the White House to boost earnings for Americans at the bottom of the income ladder.

"We've got to keep making sure hard work is rewarded," Obama wrote in an op-ed published Monday on The Huffington Post. "That's how America should do business. In this country, a hard day's work deserves a fair day's pay."

No doubt many families will benefit from the changes. But a lot depends on how employers react to the new guidelines. Here's why.

Who decides whether you get paid overtime or not?

The rules are based on a Depression-era law, the Fair Labor Standards Act, that says if you work more than 40 hours a week, you get 1.5 times your usual pay rate. The law was originally intended to protect factory workers and restrict child labor at a time when some 25 percent of children were working 60 hours a week and earning just $4, according to the American Action Forum, a conservative think tank.

But under the law, managers and professional workers who earned high salaries and performed certain types of work were exempt from overtime.

So why change the rules now?

Because the salary threshold used to determine who is exempt hasn't kept up with inflation. Proponents of the change, like the Economic Policy Institute, which advocates for low-income households, contends that millions of low-wage workers in fast food, retail and other industries are designated as "managers" to avoid paying them overtime. Based on the current threshold, any salaried worker making more than $455 a week—or $23,660 a year—can be called a "manager" and be exempt from overtime pay. The White House wants to raise that threshold to $970 a week by next year so that any salaried worker making less than $50,440 a year would get overtime.

How many workers are we talking about?

The White House estimates that up to 5 million workers will be helped, some 56 percent of whom are women, and 53 percent with a college degree. To keep up with inflation, the new threshold would be pegged to the 40th income percentile. That would help keep future low-wage workers covered, according to EPI. The group estimates that only 8 percent of low-wage workers are covered today under the current salary threshold, down from 62 percent of workers in 1975.

That all sounds fair: Don't these "exempt" lower-wage workers deserve to get paid overtime?

President Obama thinks so. But critics of the proposal argue that it remains to be seen whether the higher threshold will boost as many paychecks as the White House is hoping for.

"Very few people will benefit at all and only a very small percentage of those who are affected are actually in poverty," according to Ben Gitis, director of labor market policy at the American Action Forum. "That is because most salaried employees who work more than 40 hours each week actually earn more than any feasible new salary level test."

So how many workers will actually earn more money?

A lot depends on how employers respond to the new threshold.

A study commissioned by the National Retail Federation estimated that, with a new threshold of $808 a week, retail and restaurant industry employers would convert about a third of the 1.7 million affected workers to hourly status, and about one-fifth of all workers would get about $10,000 in overtime pay.

But the study predicted that companies would likely simply cut base wages to make up the difference and that about 10 percent of workers would see their overall hours reduced, cutting their overall pay. Employers would also likely reduce bonuses and benefits to offset the higher cost of overtime, the authors of the NRF study said.

"Employers would likely hire more part-timers to do that work, and cut base pay and benefits to keep peoples' compensation the same overall," the NRF said. "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."