June 29, 2016

Overtime Rule to Shrink Salaried Workforce

  • The salary threshold doubled in the Department of Labor’s recent revision to the overtime rule and will multiply every three years as the threshold automatically updates.
  • The overtime rule will limit access to management positions for many workers. Within a few years, only two-thirds of salaried positions that existed in 2016 would remain exempt from overtime requirements.

The Department of Labor’s final overtime rule more than doubles – from $23,660 to $47,476 – the annual salary threshold under which workers generally qualify for time-and-a-half pay when working more than 40 hours in a week. The department also took the unprecedented step of automatically increasing the salary threshold. Not only will the new rule create challenges for employers but employees will very likely be disadvantaged as well.

Last year, a report for the National Retail Federation found that it is unlikely that many of these workers would see their take-home pay improve simply because they gain the potential to earn overtime pay. Employers will likely use a variety of strategies to reduce the additional labor costs in order to remain competitive. The new rule will cause many employees to be reclassified as hourly workers as an alternative to raising their salary above the new salary threshold. As hourly workers, they will lose various advantages they enjoyed as salaried workers. Opportunities for job advancement into management will be reduced.

“Entry-level management positions are going to disappear and those employees will fall back into hourly jobs.” National Federation of Independent Business, 05-17-2016

Rule Squeezes wages

The Obama administration crafted the rule to be indexed every three years at the 40th percentile for salaried workers. Hourly workers are excluded from the indexing computation. As employers cut back on which workers are salaried, higher-wage people will be the ones left in the pool, and so the overtime salary threshold will quickly escalate. Wages will compress as the indexing formula drops the lower-wage workers from the indexing calculation.

In 2020, when the salary threshold is first scheduled to update, the human resource association WorldatWork estimates the annual salary threshold will jump to $70,966. Only 66 percent of the workers who were paid on a salaried basis in 2016 will continue to be exempt from the overtime requirements in 2020. These people will continue to be salaried, the others will have been switched to hourly workers. Employers will continue to make adjustments including switching more workers to hourly status, and every three years the threshold will rise again.

Erosion of Salaried Workers

Labor overtime rule wage increase effects chart

By 2026, only 30 percent of salaried workers will remain under the overtime rule’s automatic 40th percentile threshold update. By 2032, the annual salary to remain exempt from the overtime rule is expected to rise to $262,060. All salaried workers under that amount will likely be eligible for overtime pay.

Issue Tag: Labor