BUSINESS

Obama's new overtime rules: How they'd work and who they'd affect

President Obama on Wednesday announced a long-anticipated change in labor rules, which would extend overtime benefits to an estimated 5 million people nationwide. Here’s how federal overtime regulations work now and how they would change under the proposed rules.

What are the changes the Obama administration is proposing?

The proposed changes would more than double the salary threshold for overtime eligibility to $970 a week in 2016. That means employees earning a yearly salary of $50,440 or less automatically would be eligible for overtime pay.

Currently, the threshold is $455 a week, meaning a salaried worker making more than $23,660 a year does not automatically qualify for overtime pay under federal standards.

The threshold was last updated in 2004, and the Obama administration says it’s been eroded by inflation. President Obama also is proposing to adjust the salary threshold automatically in the years to come, either by tying it to inflation indexes or by basing it on median wage levels.

How is overtime eligibility determined now?

Hourly employees are automatically eligible for overtime pay. This used to be the case for most salaried workers, but not so much anymore.

Currently, workers whose yearly salaries are $23,660 or less automatically qualify for overtime pay if they work more than 40 hours in a week.

These rules don’t apply to workers who are classified as executive, administrative or professional employees. For example, a supervisor in a fast-food restaurant may not be entitled to overtime even if he or she does much of the same work as a kitchen employee.

For workers who earn a salary higher than $23,660 a year, employers perform a “duties test”: They assess whether the worker performs mostly executive, administrative or professional duties. If so, the worker is not entitled to earn overtime. This is known as the “white-collar exemption.”

The Obama administration is still considering changes to this exemption and has asked for comments on whether the duties test is working as intended.

How many people are the new rules expected to affect?

The Obama administration says the proposed changes would affect an estimated 5 million workers nationwide. The new overtime regulations would cover about 40% of the country’s full-time salaried workforce, officials say.

In a conference call with reporters Tuesday, Labor Secretary Thomas Perez said the new rules could add as much as $1.3 billion nationwide to workers’ pockets.

What effect would this have in California?

The proposed rules would bring a big change, experts say, but their effect wouldn’t be felt as strongly in California. That’s because California has stricter overtime laws, including a salary threshold that is twice the minimum wage of $9 an hour.

Currently, that means workers with annual salaries of $37,440 or lower qualify for overtime pay. That threshold will rise to $41,600 in January, when the state’s minimum wage is raised to $10 an hour.

In addition, California requires that employers pay time-and-a-half overtime when eligible workers reach more than eight hours in a day, even if they don't surpass 40 hours in a week.

According to figures released by the Obama administration, 420,000 workers in California would benefit from the changes, but it’s unclear whether this calculation takes into account the state’s existing overtime laws.

Why does Obama have the authority to do this?

The Fair Labor Standards Act, passed in 1938, gives the president broad authority to set the rules without seeking lawmakers' approval. The Department of Labor, at the direction of the president, can propose new rules under the federal rulemaking process.

Next, the proposed rules will be published in the Federal Register. After that, the Department of Labor will hold a 60-day comment period in which stakeholders and citizens can submit comments on the topic.

The administration must consider these comments before announcing a final rule.

What do opponents say will happen if the new rules are instated?

Industry and business groups largely denounced the proposed changes Tuesday, saying they would lead employers to reclassify salaried workers as hourly employees, thereby stripping those workers of benefits and flexibility in the workplace.

In a statement, the National Retail Federation said few workers would actually see bigger paychecks.“There simply isn’t any magic pot of money that lets employers pay more just because the government says so,” said David Frenchon, NRF senior vice president for government relations.

Alexander Passantino, an attorney at Seyfarth Shaw and former acting administrator of the U.S. Labor Department’s wage and hour division, agreed.

“It doesn’t mean they get a giant pile of overtime pay,” Passantino said. “The employer isn’t going to work them the exact amount they were working before.”

A recent report released by the NRF said that employers were much more likely to cut wages and bonuses or reduce hours to avoid paying overtime. If employers made no changes to their pay and scheduling structure, an option the NRF acknowledged is highly unlikely, overtime costs would run businesses $9.5 billion under the proposed changes, the report said.

The U.S. Chamber of Commerce said the new rules would especially hurt small businesses.

Why do advocates of the change say it’s necessary?

Labor Secretary Thomas Perez told reporters that too many managers are falling behind and getting caught in the “middle-class squeeze.”

Proponents of the change say the salary threshold, designed to exempt highly paid white-collar workers, hasn’t seen meaningful change for more than 40 years. In 1975, more than 60% of salaried workers were eligible for overtime. Today, less than 8% of full-time salaried workers are covered by those regulations, according to the White House Domestic Policy Council.

“In effect, we have seen inflation repeal the regulations that went into effect decades ago,” said Harley Shaiken, a labor economist and professor at UC Berkeley.

Setting a “bright line” with an updated salary limit will help employees who have been routinely misclassified as managers, even though they may make as little as $25,000 a year, the Obama administration says.

Overall, said Ken Jacobs of UC Berkeley’s Center for Labor Research, employers are likely to add jobs or spread hours to underemployed workers. “If anything, we would expect this to increase employment, not decrease it,” he said.

What’s the estimated cost to employers?

According to the Obama administration, the new employers could cost employers between $240 million and $255 million per year in direct costs.

Business groups estimate the costs would be much higher. A recent study commissioned by the National Retail Federation estimated employers could shell out as much as $874 million to update payroll systems, convert salaried employees to hourly, and track their hours if similar regulations were imposed.

How long will it take for these rules to go into effect?

It’s hard to say for sure.

Christine Owens, director of the National Employment Law Project, said Tuesday that the rule could be adopted by the end of the year, for implementation by January 2016.

“I think that would be a really aggressive timeline,” said Corrie Conway, a Washington, D.C.-based attorney and former policy advisor at the Department of Labor who helped develop the overtime regulations issued in 2004.

That time, Conway said, it took more than a year to finalize the proposed rule changes.

UPDATES

5:30 p.m.: This post has been updated throughout with additional information and comments from the National Retail Federation, the U.S. Chamber of Commerce, Shaiken, Conway and Jacobs.

The first version of this post was published at 12:45 p.m.

Times staff writers Michael Memoli and Chris Kirkham contributed to this report.

For more breaking news, follow me @cmaiduc

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