PowerPoint presentation via National Journal Explaining Obama Administration’s Overtime Expansion Proposal for Department of Labor’s
Overtime Exemptions
National Journal Presentation Credits Producer: Christine Yan
Director: Afzal Bari
Employees Satisfying Certain Duties Tests May Be Exempt From Overtime Pay
Source: US Department of Labor Wage and Hour Division, “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act.”
Key Definitions for Understanding Overtime Exemptions
Salaried employees making less than $100,000 annually whose duties meet guidelines set by the Department of Labor which classifies their role as Executive, Administrative, or Professional.
Highly Compensated Employees are classified as such if their annual compensation is $100,000 or greater.
EAP Employee
HCE Employee
Analysis
• Salaried employees classified as EAP or HCE employees may be exempt from overtime pay under the Fair Labor Standards Act if their salary falls above a certain threshold and if they satisfy one of the Executive, Administrative, Professional, and HCE duties tests
• In June, the Obama administration’s Department of Labor proposed raising the overtime exemption threshold to $970 (weekly compensation) for EAP employees and $122,148 (annual compensation) for HCE employees
• An increase in the thresholds would make fewer employees exempt from premium overtime pay
All of the following must be satisfied:
• Primary duty is managing the enterprise or subdivision of the enterprise
• Regularly direct at least two full- time employees
• Have authority or significant influence in hiring decisions
Executive Duties Test
All of the following must be satisfied:
• Primary duty is office or non- manual work related to
management or general business operations
• Primary duty requires use of discretion and independent judgment
Administrative Duties Test
All of the following must be satisfied:
• Primary duty is intellectual in character and requires advanced knowledge in a field of science or learning
• Advanced knowledge is acquired by a prolonged course of specialized intellectual instruction
Professional Duties Test
• Employee must regularly perform at least one of the duties of an EAP employee
HCE Duties Test
Obama Administration’s Overtime Expansion Proposal Doubles Salary Threshold for EAP Exemption
Source: Department of Labor, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” July 6, 2015
Who Is Exempt from Overtime Pay Under DOL Regulations
Analysis
• Under DOL regulations, all workers are entitled to premium overtime pay for each hour worked above 40 hours a week until found to be exempt; President Obama’s proposal doubles the weekly salary threshold for EAP employees’ exemption from $455 to $970 and increases the annual salary threshold for HCE employees’ exemption from $100,000 to $122,148
• The proposal also advocates automatically adjusting exemption thresholds in the future such that the threshold for EAP workers is set as the 40thpercentile of full-time salaries, and for HCE workers as the 90thpercentile of full-time salaries
$455 per week or more Exempt
Less than $455 per week Nonexempt
Less than $100,000 per year Nonexempt
Salaried: Neither Salaried: HCE
Salaried: EAP
$100,000 per year or more
Exempt $122,148 per year or more
Exempt
Less than $122,148 per year Nonexempt
$970 per week or more Exempt
Less than $970 per week Nonexempt
2016 Proposed Threshold Current Threshold and Status
Hourly
Change Type of Worker
Nonexempt Nonexempt No changes
Nonexempt Nonexempt No changes
22% increase in threshold
113% increase in threshold
Weekly Salary Threshold for EAP Overtime Exemption Has Eroded Over Time Due to Inflation
Source: National Journal Research; Ben Gitis, “Primer: Overtime Pay Regulation,” American Action Forum, November 20, 2014; Bureau of Labor Statistics.
Historical Weekly Salary Threshold for EAP Exemption Adjusted for Inflation
Analysis
• The weekly salary threshold for the EAP exemption has been updated 7 times since its inception in 1938; however, it’s only been updated once since 1975, and not enough to bring the threshold up to previous levels after accounting for inflation
• Inflation essentially repeals regulations, making it necessary to continuously adjust the salary threshold
• Historical real values of the threshold have also aimed for the proposed 2016 level ($970) as the cutoff for exemptions. Past increases have either brought the threshold up to this level (pre-1960) or occurred when the decline hit this level (highlighted portion of graph)
Proposed 2016 Threshold
The Department of Labor Estimates 1.2 Million Employees Would See Wage Increase From New Overtime Regulations
Source: Department of Labor, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” July 6, 2015, Christine Mai-Duc, “Obama’s New overtime Rules: How They’d Work and Who They’d Affect, Los Angeles Times, June 30, 2015.
Estimates for Number of Currently Exempt Employees Who Would Gain Overtime Benefits
Analysis
• Assuming no response from employers (i.e. reclassifying employees), around 4.7 million HCE and EAP employees would become newly entitled to overtime pay, but the Department of Labor has found that only 1.2 million of these employees work overtime and would see their pay increased due to the rule change
• Labor Secretary Thomas Perez estimates that in total, employee compensation would increase by $1.3 billion a year
• However, these numbers are unrealistic, as employers’ responses to the regulation changes would likely affect employees’ eligibility
36,200
employees newly eligible 14,500 employeesregularly work overtime 1,000 employees
sometimes work overtime
40%
3%
EAP Employees
HCE Employees
4.6 mil
employees newly eligible 988,000 employees regularly work overtime 180,000 employeessometimes work overtime
21%
4%
Estimates of Overtime Pay Proposal’s Impact Vary
Source: Department of Labor, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” July 6, 2015, National Retail Federation, “Rethinking Overtime,” Ben Gitis, “Primer: Overtime Pay Regulation,” American Action Forum, November 20, 2014, Ross Eisenbrey and Lawrence Mishel, “The New Overtime Salary Threshold Would Directly benefit 13.5 Million Workers,” Economic Policy Institute, August 3, 2015.
Different Estimates Of Employee Benefits and Employer Costs Resulting From Overtime Changes
Analysis
• Because there is no data source for the number of EAP overtime pay-exempt employees, estimates for the number of workers who would be affected by the new rules greatly differ depending on the methodology used
• Economic Policy Institute’s estimate of the number of workers who directly benefit from the changes is much higher than the Department of Labor’s estimate because EPI includes an estimate of 8.1 million workers who would have their overtime protections strengthened due to the increased threshold
Number of Workers Who Benefit
Administrative Costs for Employers (first year)
Department of Labor: $593 million National Retail Federation: $745 million
(for retail and restaurant industries alone)
Department of Labor: 4.7 million Economic Policy Institute: 13.5 million
American Action Forum: more than 2.6 million
(excludes employees who don’t work overtime)
Goldman Sachs: 120,000
(new hires for jobs created from reduced hours)
Employers May Respond to New Overtime Regulations With Cost-Cutting Measures
Source: Corey Stern, “Goldman Sachs thinks new overtime pay rules could increase total employment – but do nothing for wage growth,” Business Insider, July 7, 2015.
Possible Actions Employers May Take and How Employees Would be Affected
Analysis
• Because employers, especially small businesses, are almost guaranteed to enact cost-cutting measures in order to offset administrative and payroll costs due the new regulation, employees are likely to lose in at least one aspect, whether it be reduced bonus, benefits, flexibility, or hours
• Some employees may be reclassified as hourly workers and see a hourly wage reduction, while some employees with a salary near the new threshold may see their salary increased so that their employers can avoid paying overtime premiums
1. RECLASSIFY SALARIED WORKERS AS HOURLY WORKERS
• Guaranteed overtime pay, but average hourly wage may be lowered in order to keep total weekly compensation constant, and benefits may be reduced to offset employer administrative costs
• Less flexibility, unlikely to be able to work remotely due to hour-tracking requirements
• Fewer opportunities for advancement
2. REDUCE HOURS TO AVOID OVERTIME PREMIUMS
• Limited to 40 hour workweek
• Less flexibility, unlikely to be able to work remotely due to hour-tracking requirements
• Reduced bonus/benefits/base wages to offset employer costs 3. INCREASE SALARY OF EMPLOYEES NEAR THRESHOLD
• Employees with salaries slightly below the threshold may have their salaries increased to keep them exempt from overtime pay
• Bonus/benefits may be reduced to offset the salary increase
Critics of Overtime Expansion Proposal Point to Unintended Consequences for Both Employees and Employers
Source: Tanya Basu, “What to Know About Obama’s Overtime Pay Announcement,” TIME, June 30, 2015, Ben Gitis, “Primer: Overtime Pay Regulation,” American Action Forum, November 20, 2014, James Sherk, “Salaried Overtime Requirements: Employers Will Offset Them with Lower Pay,”
Heritage Foundation, July 2, 2015, National Retail Federation, “Rethinking Overtime,” U.S. Chamber of Commerce, “U.S. Chamber Statement on Obama Administration’s Overtime Proposal,” June 30, 2015, Christine Mai-Duc, “Obama’s New overtime Rules: How They’d Work and Who They’d Affect, Los Angeles Times, June 30, 2015, AFL-CIO, “President Richard Trumka Applauds Overtime Expansion Proposal,” June 30, 2015, Harry J. Holzer, “Overtime Pay Will Boost America’s Wages,” Brookings, July 2, 2015.
What Supporters and Critics Say About Obama Administration’s Overtime Proposal
Supporters Critics
Employers will cut hours in response to the higher threshold, but this will add jobs as overtime hours are spread around.
- UC Berkeley’s Center for Labor Research
The proposal will reverse decades of wage decline.
- National Employment Law Project
The changes will provide a necessary boost to the economy, but this is just a first step.
- AFL-CIO
In the end, most employees will likely come out ahead due to the overtime premium even if base wages decline.
- Brookings
Regulations hurt small businesses and employees will lose hours, benefits, advancement opportunities, and work flexibility.
- U.S. Chamber of Commerce
Overtime expansion will lead to lower base wages, loss of work flexibility, and reclassification of salaried workers to hourly workers.
- Heritage Foundation
Most employees won’t see a change in net income, and administrative expenses alone (updating payroll systems, creating hour tracking methods) would cost restaurant and retail industries $745 million.
- NRF Oxford Economics Study
Very few people will benefit from the rules, and research suggests that the changes will lead to part-time work replacing full-time work.
- American Action Forum
Analysis
• Many business groups and much of the Republican party have expressed disapproval of the Obama administration’s overtime proposal
• While supporters recognize some of the unintended consequences of the change that critics emphasize, such as reduced hours of existing employees, they argue that this will lead to job creation and ultimately boost the economy
• Both supporters and opponents expect the proposal to be challenged in courts and by Congress