Obama expands overtime pay to millions. How will employers adjust?

President Obama and the Labor Department unveiled a plan this week to make at least 5 million additional salaried workers eligible for overtime pay. Pro-business lobbying groups are denouncing the changes, but economists argue that better overtime pay rules will benefit businesses and workers alike. 

President Obama’s plan to extend overtime pay to millions of workers, while applauded by labor advocates, was coolly received by the country’s business interests, who are warning that it could prompt employers to reduce hours and keep workers from advancing into salaried, managerial positions.

But those in favor of the changes argue that the new rules will actually incentivize businesses to boost hiring while retaining their valuable salaried workers, at more reasonable hours. So what will come of the new overtime rules: fairer pay for a large segment of the salaried US workforce, or a big reduction of such jobs altogether?

Long-anticipated in Washington, the Obama administration’s proposal would more than double the pay threshold under which salaried workers who work at least 40 hours a week can qualify for overtime pay, and would apply even to workers who are classified as managers or professionals. Currently, salaried workers have to make $455 a week or less ($23,660 a year) to qualify for overtime; in 2016, the threshold would be raised to an estimated $970 per week (about $50,440 per year).

Additionally, the salary threshold will be indexed for the first time, meaning it would adjust to fluctuations in inflation and wages.

The changes will make an additional 5 million workers eligible for overtime pay by 2016, according to the administration, and were conceived as a measure to counteract the glacial pace of wage growth in recent years.

“Right now, too many Americans are working long days for less pay than they deserve,” the president wrote in a Huffington Post op-ed announcing the deal Monday evening. “An exemption meant for highly paid, white collar employees now leaves out workers making as little as $23,660 a year – no matter how many hours they work.

The Labor Department’s rules regulating overtime pay haven’t been “meaningfully updated in over 40 years,” US Labor Secretary Thomas Perez said in a Tuesday morning conference call with reporters.  Because the overtime salary threshold hasn’t been regularly updated during that period, it now sits below the poverty line for a family of four, according to statistics from the Labor Department.

Mr. Perez noted that when the overtime-exempt salary limit was instituted in the 1970s, two-thirds of salaried workers still qualified for overtime pay. Now, it’s 1 in 10.

Democrats and labor advocates applauded the proposal, calling it an important victory for middle- and lower-class workers who have been largely sidelined by the economic growth since the Great Recession. “This action will help ensure more workers share in the wealth they help create," Neera Tanden, president of the Center for American Progress (CAP), said an e-mailed statement. “This most basic of protections will help provide that security and help millions of American families get a little closer to living the American dream.”

Business interests, however, were quick to warn that the new rules could be bad for workers, prompting employers to cut hours and demote employees from benefits-eligible salaried positions to hourly jobs.

“This change is likely to have the opposite of its intended effect and will clearly harm more workers than it helps,” Robert Cresanti, a spokesman for the International Franchise Association, said in an e-mail. “Millions of salaried workers will now become hourly and lose out on key benefits such as workplace flexibility and long term advancement opportunities. This is just the latest example of the Obama Administration unnecessarily meddling in the everyday management of small businesses.”

“The Administration seems to be under the distorted impression that they can build the middle class by government mandate,” a statement from the National Retail Federation reads.  “Turning managers into rank-and-file hourly workers takes away the career opportunities offered by private sector entrepreneurs and job creators that are the true path to middle-class success.”

Perez, however, counters that the change will be a net positive for workers on multiple fronts. The Labor Department estimates that the change will put between $1,2 billion and $1,3 billion in workers’ pockets the first year, he says. But even salaried workers who had been working 50 or 60 hours per week and see their hours decrease may not get a salary increase, but they will get those extra hours back in free time. Second, employers will have to hire workers to cover those 20 extra hours in lost productivity, so the measure has the potential to effectively boost hiring on the whole.

“Every time we propose leveling the playing field for workers we hear the sky is falling,” he says, “but the employers that I have spoken to understand that the managers at the center of this rule are their most valuable employees.”

What’s more, many economists argue, slow movement on the consumer spending front has been a major hiccup in terms of economic growth, and strengthening overtime pay is one way to get earnings back to a level where workers can put money back into the economy. “Updating the overtime rule would grow the economy much the same way increasing the minimum wage would,” CAP economist Brendan Duke wrote in a paper last summer. “Paying workers for overtime would allow middle-class households without much cash or credit to spend money, which in turn would give companies a reason to hire.”

Industry competition, as it has among US companies raising their minimum pay rates in recent months, will likely play a part as well: As the labor market continues to tighten, businesses that offer salaried positions that comply with the new overtime rules can use that as a selling point to attract the best talent.