The Department of Labor doubled the threshold at which salaried workers are entitled to overtime pay on Wednesday, a move it says will benefit 4.2 million workers. Some business and legal experts, however, warn that the amount of the increase will cause labor costs to rise while slowing job growth.
The previous threshold of $23,660, set in 2004, expanded to $47,476 — less than the $50,440 proposed in July but still a sizable jump.
“Of course it needed to be raised, because inflation has gone up since then,” said David Dubberly, chair of regional law firm Nexsen Pruet’s employment and labor law group. “The problem is they doubled it. That’s just too dramatic of an increase.”
The federal government’s stance is that, under the current threshold, employees classified as salaried can be required to work more than 40 hours a week with management-level responsibilities while earning a salary that is just above the federal poverty level of $23,400 for a family of four.
The new threshold, which goes into effect Dec. 1, sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census region, the South. It will automatically update every three years and allows employers to use bonuses and incentive payments, including commissions, to satisfy up to 10% of the new standard.
“This long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President (Barack) Obama’s commitment to ensuring every worker is compensated fairly for their hard work,” the Department of Labor said on its website.
But that money will have to come from somewhere, said local analysts, who expect retail, service and nonprofit industries to feel the biggest effects.
“It’s going to hurt employees more than it’s going to help employees,” said Pat Wright, the Thomas C. Vandiver Bicentennial Chair in the University of South Carolina’s Darla Moore School of Business and a national human resources expert. “You can’t increase (companies’) labor costs significantly without them being able to find a way to offset that labor cost to survive.”
Employees already making close to the new threshold may simply get a raise. Others further from that figure may be re-classified as hourly, which could mean some of the benefits of being a salaried employee, such as paid time off or disability insurance, disappear.
“Nobody benefits from that,” Wright said. “The employees lose the flexibility that they had being a salaried employee, when they didn’t have to punch or clock or could come in late or leave early.”
Employers may also eliminate perks or push for faster conversion to cheaper automated processes.
“There are going to be some companies that cut their number of full-time employees, make some of them part time, or just make sure there’s less overtime worked,” Dubberly said. “Some of them may have to cut out year-end bonuses. If (an employee) makes $35,000 now, nobody’s going to give a $12,500 increase all in one shot.”
Ted Pitts, president and CEO of the S.C. Chamber of Commerce, said in a news release that raising the threshold amounted to federal interference in state business affairs.
“Instead of making more employees eligible for overtime, this rule is sure to only limit opportunities for employees as employers are forced to make the decision to have fewer workers with higher wages,” Pitts said.
Frank Knapp, president and CEO of the S.C. Small Business Chamber of Commerce, sounded a more even-keel note, saying time will tell how the new number affects businesses.
“The small business owners that are affected will adapt to it in their most appropriate way,” Knapp said. “That most appropriate way may be to put everybody on an hourly basis and then ask them to not work over 40 hours a week. It remains to be seen. It is a marketplace. It will find an equilibrium.”
Chuck McDonald, a shareholder in the Greenville office of law firm Ogletree Deakins and a S.C. Supreme Court-certified specialist in employment and labor law, said some businesses, such as those without many salaried employees, won’t be affected much, while other may reclassify some positions. Some, though, may have to revamp their payment structure or workforce.
“You’re going to see businesses make changes that suit their particular business need and model, and it may vary even within the same industry,” McDonald said.
Knapp said employees making more will have more money to spend, but “that’s all based on the assumption that companies will be able to pay more,” Wright said. “If they have to pay more, they’ll pay more to certain individuals, but to fewer individuals, so there won’t be a net increase.”
Companies may also be forced to raise prices, Wright said, which will have a more negative impact in states such as South Carolina with a lower-than-average cost of living.
“I don’t think you’re going to wake up on Dec. 1 and all your prices are going to be substantially higher,” McDonald said. “It really does depend on who you’re talking to as to how much it helps or hurts a particular business. When you read through their discussions of the comments they received, it does look like the Department of Labor tried to find a reasonable middle ground that would be representative of all employers throughout the country.”
The department published a Notice of Proposed Rulemaking in the Federal Register on July 6 indicating the threshold would be rising and inviting public comment. The department received more than 270,000 responses.
“It’s a good idea to have updated regulation about this,” Knapp said. “I never think it’s a good idea to abuse your employees, and for those few businesses in certain sectors that were really taking advantage of their employees by paying them $23,000 and calling them managers and making them work 60 hours a week — that’s abusing them.”