Employees making as little as $23,660 a year can be classified as exempt now — and thus not be owed time-and-a-half pay when they work overtime. That changes on Dec. 1 when the threshold for exempt employees nearly doubles to $47,476 per year.
The U.S. Department of Labor, which announced the new rule this year, estimated that 4.2 million workers will become eligible for overtime pay essentially overnight. The agency also estimates the changes will translate into a net increase of $12 billion in additional earnings for employees over the next decade. The government estimates 134,000 Ohioans and 101,000 Michiganders are among those who will benefit.
The changes, which are part of a larger effort from the Obama Administration to do what it can to boost wages, have been cheered by labor groups as a way to not only give Americans a raise but also to cut back on situations where lower-income workers are forced to put in long hours but not paid for their time.
“This means that you can’t take a worker that’s making $30,000 or $35,000 a year and make them work 60 hours (a week) and not pay them for it,” said U.S. Sen. Sherrod Brown (D-Ohio). “It’s pretty clear.”
Predictably, the reaction from the business community has been decidedly more apprehensive, with some warning that job losses are likely.
Not all economists agree, however.
Mekael Teshome, an economist with PNC Financial Services Group, said that, while the changes evoke a lot of emotions on both sides of the issue, the impact on the broader labor market is small, with some workers getting raises and some businesses having slightly higher costs.
“In principle, it’s good,” Teshome said. “It does lead to in increase in cost for some businesses, but in the grand scheme of things, I don't think it will be a major drag.”
Teshome said the dialogue around the new regulation, in some ways, reminds him of the Affordable Care Act, often dubbed Obamacare.
“What we found in our small and midsized business surveys is since the act has taken effect is that businesses don’t like it, but it hasn’t restrained as much activity as it was believed. Businesses find other ways to compensate for that,” Teshome said.
Still, there’s no question that employers are looking at this overtime issue closely.
“I think employers are feeling a little bit shell-shocked by some of the federal regulations, particularly small businesses,” said Jim Yates, an attorney with Eastman & Smith in Toledo who specializes in employment and labor law.
Yates said he’s getting a lot of questions from employers about how to comply with the law and what costs are going to be associated with this compliance.
“It’s a large administrative burden for the HR professionals in these organizations and some smaller organizations (that) don't have a large HR department,” Yates said. “They’re sort of scrambling to try to figure out how to do this.”
Experts say the regulation applies the same to every employer, including nonprofit organizations, which have been singled out by many as a particular area of concern.
In a statement, Karen Mathison, chief executive officer and president of the United Way of Greater Toledo, said the organization has staff who will fall under the rule change and is exploring options.
“At this time, that is all we are able to share as we continue to fine tune how United Way of Greater Toledo will respond to the Department of Labor,” Mathison said.
Local business groups say the rule changes have the potential to affect a large number of employees in the Toledo area.
“This probably has the ability to impact every single business in every single sector. When you look at just what the average salary is in the Toledo region, that $47,000 encompasses a lot of those people," said Brian Dicken, vice president of advocacy and public policy at the Toledo Regional Chamber of Commerce. “You’re talking about restaurant managers, people in grocery stores, some of your midlevel managers that may be just under that are all going to be impacted.”
One of the biggest concerns from the business community isn”t so much that the wage threshold was raised for exempt employees — it hadn’t been adjusted since 2004 — but that it’s being escalated so much and all at once.
“It’s overdue. But I think the Department of Labor went too far in taking it to $47,476,” said Bob Bethel, director of human resource services at the Employers’ Association in Maumee. “If they would have adjusted it to $35,000 to $40,000 everybody would have said, ‘yep, sounds about right.’ At this level it just sounds too high, and there are going to be those unintended consequences.”
Employers essentially have three options for workers who will be newly eligible for overtime. They can raise salaries to meet the new threshold, they can start paying overtime to those below the threshold, or they can seek to limit the hours of workers.
A recent survey of 57 area companies by the Employers’ Association found less than half plan to address the issue by raising salaries to the $47,476 threshold.
Of the 41 percent who said they would look to boost salaries, not a single employer said they’d consider a raise for someone making $40,000 or less. The association found 32 percent said they’d look at raises for those employees making $40,000 to $45,000, while 68 percent said they would do so for employees making more than $45,000.
Of the companies not looking to give raises, 49 percent said they would convert salaried employees to an equivalent hourly wage and restrict overtime; 37 percent said they would bring salaried employees to an equivalent hourly wage and pay overtime, and 14 percent said they would convert employees to a lesser hourly rate and pay overtime, with the thought that the total net pay would equal out.
Bethel said that last option seems risky.
“The bottom line would be that they maintain their pay as long as they maintain the hours of work. But to me, there's a big risk in that because it could really result in morale problems because it’s going to lower what people perceive as their hourly rate.”
Beyond morale problems, some critics say large administrative costs will be associated with suddenly having to reclassify and track hours for millions of employees. The National Retail Federation, one of the leading voices that has opposed the measure, has said those costs could total $745 million for the restaurant and retail industries alone.
David French, the group’s senior vice president for government relations, has called the changes a “career killer,” arguing findings from the federation-commissioned study don't bear out what the Department of Labor has said.
“Most of the people impacted by this change will not see any additional pay,” French said. “Instead, this sudden and extraordinary increase will mean more red tape and fewer advancement opportunities for salaried professionals.”
The retail trade group and others say that, even if pay remains the same, the loss of exempt status could hurt employees who would lose the flexibility and fringe benefits that comes with being salaried.
The organization also warns of a reduction in entry-level management jobs, as more duties are shifted to hourly employees lower within the company hierarchy.
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