Moving to fatten low- and middle-income paychecks that have languished for years, the Obama administration on Tuesday unveiled a long-awaited rule that will make millions of Americans newly eligible for overtime pay.

While some businesses welcome the measure, many say it will simply force them to reshuffle salaries to get around the regulation. Others fear it will mean demoting white-collar workers and altering workplace cultures.

Businesses adopt myriad responses to overtime rule

The rule, slated to be formally released Wednesday, would essentially double the threshold at which executive, administrative and professional employees are exempt from overtime pay to $47,476 from the current $23,660. That’s expected to make 4.2 million additional workers eligible to receive time-and-a-half wages for each hour they put in beyond 40 a week.

Labor Secretary Thomas Perez said the salary threshold was originally intended to exempt high-paid executives but instead has denied overtime to low-level retail supervisors and entry-level office workers who often toil 50 to 70 hours a week.

“Too few people are getting the overtime that (federal law) intended,” he told reporters. “It’s simply not right.”

Vice President Biden called the change a critical part of the White House’s goal of “restoring and expanding access to the middle class. The middle class is getting clobbered.”

The rule represents the administration’s most prominent initiative to lift middle-class wages. President Obama’s call to raise the federal minimum wage from $7.25 an hour to more than $10 has been stymied by Republicans in Congress. The share of full-time workers who qualify for overtime has fallen from 62% in 1975 to 7% today, according to the administration. The new rule, which would take effect Dec. 1, would allow 35% of workers to qualify.

Many companies expect to convert salaried workers to hourly employees who will need to punch a clock and track their hours, hurting morale in some cases. Some will likely maintain the status of salaried employees, but will still have to monitor their hours and net the extra pay for logging more than 40. Others will lift workers’ base pay to the new threshold to avoid paying overtime.

Many small businesses can’t absorb the added cost and will instruct employees to work no more than 40 hours a week, bringing on part-time workers to pick up the slack, says Dan Bosch, head of regulatory policy for the National Federation of Independent Business. Perez said that will still be a plus because it will restore leisure time to overworked employees.

Yet some businesses plan to cut employees’ base pay to offset the overtime, effectively skirting the requirement.

“The Obama rule puts a huge cost and regulatory burden on employers, who will face pressure to cut back on benefits and full-time employees,” says Trey Kovacs, policy analyst with the Competitive Enterprise Institute.

But U.S. Rep. Mark Takano, D-Calif., said it’s “long overdue,” adding that “millions of employees are working long hours without fair compensation.”

The administration, which initially proposed the rule last summer, did make concessions in response to the 270,000 public comments it received. It lowered the new salary threshold to $47,476 from the proposed $50,544.

And it’s allowing employers to apply bonuses and incentive payments to up to 10% of the new salary threshold. The threshold also will be updated every three years instead of annually, rising to $51,000 on Jan. 1, 2020.

Perez said the new rule also clarifies the types of duties white-collar employees must perform to be exempt. That potentially makes eligible an additional 8.9 million workers now misclassified, he said, such as certain administrative employees who don’t supervise anyone.



Employers have been scrambling to prepare for a new rule that will sharply increase the number of U.S. workers who are eligible for overtime pay. But they may have more time than they thought.

The Labor Department’s final rule on overtime eligibility isn’t likely to appear before late 2016, Solicitor of Labor Patricia Smith said at a panel discussion recently, according to several people who were in attendance. Employers had been expecting the rule to go into effect late this year or early next.

representatives of the agency weren’t immediately available to comment.

In June, the agency proposed raising the salary limit for who is eligible for overtime pay from $23,660 per year to $50,400, a change that would put millions more U.S. workers in line for overtime pay and span occupations as diverse as graphic designers and business analysts.

About 270,000 people and organizations submitted comments to the Labor Department on the proposed change, more than three times the number received when the rules were last changed in 2004. Ms. Smith said that the lengthy time needed to finish drafting the regulation was due to the volume of comments and the complex nature of the change, according to attendees.


New overtime pay scale proposed for 2016

Read Phyllis Towzey quoted in the July 1, 2015, Tampa Bay Times: click Here.

An increase in the salary threshold for “exempt employees” from $23,660 to $50,440 will result in many more salaried employees who were previously classified as exempt being eligible to receive overtime for all hours worked over 40 per week. Employers need to revisit their classifications of employees earning less than $50k and make appropriate changes to avoid a violation of the wage and hour laws. See this article for more details:

From Bloomberg Newswire, June 30

The Obama administration plans to raise the wages of millions of Americans who work more than 40 hours a week by requiring their employers to pay them overtime.

Workers who earn as much as $970 a week would have to be paid overtime even if they’re classified as a manager or professional, based on draft rules to be announced as soon as Tuesday, said an administration official.

Many employees now receiving as little as $455 a week, or $23,660 a year — below the federal poverty line for a family of four — aren’t entitled to overtime pay because they are classified as managers exempt from overtime pay.

The regulations, from the Labor Department, would take effect in 2016, said the official, who asked for anonymity because the plan hasn’t been announced. Workers in retail stores and restaurants are among most likely to be affected.

President Barack Obama has been stymied by Republicans in his attempts to get Congress to raise the federal minimum wage at a time when income inequality is emerging as an issue in the 2016 presidential campaign.

The new Labor Department rules would be the broadest action by the administration to bolster middle- and lower-income workers, whose wages have stagnated since the recession. Obama is scheduled to discuss the economy during a trip to La Crosse, Wisconsin, on Thursday.

Broad Reach

“You would be hard pressed to find a rule change or an executive order that would reach more middle class workers than this one,” said Jared Bernstein, a former economic adviser to Vice President Joe Biden who is now a senior fellow at the Center for Budget and Policy Priorities.

The median U.S. household income of $54,600 in April was $1,600 short of the amount at the start of the recession in December 2007, according to inflation-adjusted estimates from Sentier Research.

Ross Eisenbrey, vice president of the Economic Policy Institute, a research group partly funded by labor unions, has estimated that the higher salary threshold would expand overtime to as many as 15 million additional workers.

Business lobbyists, including the National Retail Federation, argue that changing the rules might prompt employers to reconsider their supervisory structures, reducing flexibility for managers to directly serve customers and cutting entry-level management jobs.

The 1938 New Deal-era law establishing the federal 40-hour workweek and requiring overtime for additional hours exempts professional, administrative and executive employees.

Defining Categories

Labor Department regulations define those categories, in part, through a minimum salary level. The threshold, eroded by inflation, has only been raised once since 1975, a readjustment in 2004 under President George W. Bush that was criticized as too modest by labor unions and some Democrats.

The overtime cutoff covered 8 percent of salaried workers last year, compared with 65 percent in 1975, according to an analysis by Eisenbrey.

The definition of a manager is ambiguous enough under current regulations that restaurant or retail workers who spend most of their time doing manual labor or serving customers can be deemed “executives” exempt from overtime, Eisenbrey said.

The administration official didn’t disclose whether any changes will be proposed to the regulatory definition of a manager, though the Labor Department also is considering tightening that standard.

Under the Bush administration’s 2004 rules, exempt executives must supervise at least two employees and management must be their primary duty, though there is no requirement covering the amount of time they spend on management tasks. California state regulations, by contrast, require more than half of an employee’s time be spent on management duties to be exempt from overtime pay.

The rule change has been long anticipated and under attack from Republicans and some business representatives.

Lamar Alexander, the Tennessee Republican who is chairman of the Senate Labor Committee, previously condemned Obama’s plan to act on overtime as part of an economic strategy seemingly “engineered to make it as unappealing as possible to be an employer creating jobs in this country.


The IRS and the Department of Labor (DOL) are working together conducting random audits of companies looking for workers who have been improperly classified as independent contractors instead of employees. In 2011, the DOL hired an additional 250 investigators to conduct audits.

The IRS goal is to raise additional tax dollars, since employers do not withhold income taxes or FICA from independent contractors. The DOL goal is to require companies to pay improperly classified workers back pay for all overtime that would have been due if they were classified as employees. The consequence can be economically disastrous for your business, in terms of back overtime, liquidated damages, penalties, and tax liability. In addition, the improper classification of workers as independent contractors instead of employees has implications in unemployment compensation and workers compensation.

One of the red flags to both agencies is an employer who reclassified a group of workers during the year, resulting in issuance of both a W-2 and a 1099 to the same worker for performing, basically, the same services. If your company has made a decision to reclassify workers as a cost-saving measure, make sure those workers can legitimately be hired as independent contractors under the law, or the cost-cutting effort may backfire.

Both the IRS and the DOL look at the following factors.

How closely do you supervise and instruct the worker? Workers who must comply with your instructions as to when, where, and how they work are more likely to be employees than independent contractors. It’s the difference between telling them what to do, and telling them how to do it.

Do you control the hours of work? Although there are situations when the work by its nature must be performed at a certain time or in a certain sequence, in general workers for whom you establish set hours of work are more likely employees. In contrast, independent contractors generally can set their own work hours. Also, an independent contractor usually doesn’t work for you full-time, although there are exceptions.

Do you provide training or did the worker obtain specialized knowledge from outside your business? The more training your workers receive from you, the more likely it is that they’re employees. The underlying concept here is that independent contractors are supposed to know how to do their work and, thus, shouldn’t require training from the purchasers of their services.

Where does the worker fit in your organization? The more important the worker’s services are to your business’s success, the more likely it is that they’re employees.

Does the worker need to perform the services personally? Workers who must personally perform the services for which you’re paying are more likely employees. In contrast, independent contractors usually have the right to substitute other people’s services for their own in fulfilling their contracts. Also, workers who are not in charge of hiring, supervising, and paying their own assistants are more likely employees.

Is the worker performing a specific project with an expected end-date, or do they provide continuing services? Workers who perform work for you for significant periods of time or at recurring intervals are more likely employees. Someone brought onboard for a particular project is more likely to be an independent contractor.

Where is the work performed? Workers who work at your premises or at a place you designate are more likely employees. In contrast, independent contractors usually have their own place of business where they can do their work for you.

Is the worker paid by the hour or by the job? Although there are exceptions, most independent contractors are paid by the job, not by the hour.

Who pays for expenses? Workers whose business and travel expenses are paid by the company are more likely employees. In contrast, independent contractors are usually expected to cover their own overhead expenses, as they factor it into their total charge as a cost of doing business.

Are you providing the tools and equipment? Workers whose tools, materials, and other equipment you furnish are more likely employees. Independent contractors, by contrast, usually have their own tools and equipment.

Does the worker have an investment in his or her business and the opportunity for profit or loss? The greater the worker’s investment in the facilities and equipment they use in performing their services, the more likely it is that they’re independent contractors. Similarly, the greater the risk the worker takes of either making a profit of suffering a loss in rendering their services, the more likely it is that they’re independent contractors.

Do they work for more than one client? The more businesses for which your workers perform services at the same time, the more likely it is that they’re independent contractors. Workers who hold their services out to the general public (for example, through business cards, advertisements, and promotional items) are more likely independent contractors. By contrast, an individual who works exclusively for your company is more likely an employee.

Are there restrictions on your right to fire the worker, or the worker’s right to quit? Workers whom you can fire at any time are more likely employees. In contrast, your right to terminate an independent contractor is generally limited by specific contract terms. Likewise, an independent contractor who has signed a contract to perform a specific project for your company will be in breach of contract if they abandon the project. An employee, however, is generally free to resign at any time.

Remember, no single one of these factors is determinative. The DOL and the IRS look at the combination of factors to determine whether the relationship is an employment relationship or an independent contractor relationship. How these factors are weighed can also vary based upon the specific type of business or industry.


Technology means you can be on top of business activities 24/7, and so can your employees. But stop and think before you send that after hours email or text. Unless your employee is properly classified as exempt from overtime pay under the Fair Labor Standards Act, the time that employee spends reading and responding to your email or text is compensable work time. And if they are already putting in a 40-hour week, then it’s overtime.

There has been a recent growth in wage and hour claims arising from off-premises work done by employees. Similar problems arise when employees are able to log into their work computer remotely – you as the employer are responsible for keeping a record of all hours worked by nonexempt employees. The FLSA has strict guidelines regarding which employees may be classified as exempt; you can’t solve this problem simply by giving an employee a title and paying them a salary.

Other concerns: If the employee checks email on their smart phone or even responds to text messages in the morning before leaving for the office, when does their compensable work day actually begin?

The best practice is to have clear policies on when it is – and isn’t – acceptable for employees to work outside of normal business hours. And be sure to enforce them.


Legislation is currently pending in the House of Representatives which would allow employers to offer “comp time” in lieu of overtime for nonexempt employees working in excess of 40 hours per week. Titled “The Family-Friendly Workplace Act,” the bill would give employees the option receiving one-and-one-half hours of paid leave for every hour worked over 40 in a given week, instead of receiving time-and-one-half overtime pay. Currently, the Fair Labor Standards Act (“the FLSA”) prohibits private-sector comp time, permitting only federal government employees to receive time off in lieu of overtime pay.

Comp time legislation resurfaces every few years, but its proponents have never been successful in bringing about a change in the FLSA. Critics – primarily labor unions and employee advocacy groups – argue that providing an alternative to mandated overtime payments would be subject to abuse, and employees’ elections to receive time off in lieu of pay might be coerced rather than voluntary.

Representative Cathy McMorris Rodgers (R-WA), the sponsor of the current bill, feels differently. In her recent press release, she states:

“Time is one of our most precious resources. We all want more of it and yet we only have 24 hours in a day. That means we have to figure out how to work a full day, run errands, pack lunches, make dinner and spend quality time with our kids, spouse, or elderly parent,. Giving employees more flexibility in their workweek is key to increasing retention as well as attracting great employees that will help increase our country’s competitiveness.”

The ability to offer comp time would provide welcome flexibility for employers and employees alike, particularly in the small business arena. Whether this bill has any better chance of succeeding than its predecessors remains to be seen.