Overtime Law is meant to compensate employees working more than the standard 40 hours per week in the United States of America. But it is only applicable to the workers earning equal to or less than the cutoff set by the government. This is to say the annual income of the employees must fall under the cutoff for them to be eligible for overtime. In 2004, under the George W. Bush administration, this amount was set at $23,660. Anyone earning more than this amount in a year would not be eligible to be paid overtime, even if they worked overtime.
The New Overtime Law
Under the new overtime law, passed by the Obama Administration, this last Tuesday on May 18th, the maximum annual income bar is now set at $47,476; almost double the previous annual income threshold. This means that effective as of December 1st, employees earning a maximum of this amount or less will be eligible for overtime payment by their employers.
For workers already being paid on an hourly basis, this law does not hold any consideration since their pay is already equivalent to the amount of hours they work. But for employees paid on a monthly basis, this law comes off as a huge change; for the better indeed. Millions of more workers in the US are now monetarily protected under this law in context of how much they are compensated for. According to the Wage and Labor Division of the US Labor Department, roughly 4 million more workers will be taken in the overtime protection. This implies that from a current percentage of 7% people covered by the law, a jump to almost 35% coverage will be seen as stated by the Labor Department.
With this threshold supposed to be raised every three years, the overtime law is expected to benefit an increasing percentage of workers in the US.
Purpose of the Law
This new law basically attempts to protect the huge percentage of middle class in the work stream right now, from being ‘overworked and underpaid’. It urges the employers and businesses to either limit the hours that their employees are supposed to work and if that is not possible due to the nature of work, compensate them accordingly. Either way, the goal is to protect the working class from being exploited or misused by the businesses whose main goal is their profit.
The law targets that section of the society which is entirely dependent on salaries for their sustenance unlike huge businesses that can reap long term profits benefiting them for months on end. A worker that looks up to the amount being paid to him at the end of the month is the center of this new law.
Considerations According To Duties Performed
Although the law promises protection to millions of employees additionally, it is not as straight forward when it comes to its application according to the specific capacities employees work in. Simply put, the employees that work under the administrative, executive, managerial or professional job roles that essentially involve decision making more than the core work, will not be eligible for overtime under this law. So an executive might be working for about 50 hours a week making important decisions and managing crucial tasks, he will still be exempt from overtime payment based on the title that he holds.
Furthermore, a large number of employees have raised concerns regarding the ambiguity in their job roles, putting them at risk of being excluded from protection. This is to say that many employers may misquote or wrongly define the titles of their employees to avoid paying them overtime. This implies that an employee may as well be doing the tasks essentially done by workers, but since his job role defines him as a manager or a professional, his overtime compensations might be at a huge risk.
There are, as a general rule, two ways to determine the eligibility of an employee.
- First is the standard Duties Test which decides whether the employees fall under the executive, administrative and professional categories or not. If they do, they are exempt from the effects of the law. But this test is quite subjective and employers interpret it differently. In order for an employee to be exempt from overtime under the Duties Test, his primary job role must be any of the three listed above and he must have the independence to make decisions.
The way job skills have been acquired is also a major determinant of overtime eligibility. If the skills have been developed through hands on training rather than the standard academic and cognitive discourse, the employee will be eligible for overtime.
- The second way is quite straight forward. It only takes into consideration whether the employee earns within the standard salary threshold of the new overtime law, notwithstanding his job role.
How New Over Time Law Will Affect Business Owners
The business owners, long been working and setting salary scale plans based on the law of 2004, now have to inculcate major changes in a structured manner to bring cohesion between what the law requires of them and what is practically possible for them from the business point of view.
Some of the major effects of this law on the business owners and organizations have been discussed below.
- Tough Decision Making Is Required
The most resonating of effects on the business owners will be to confront hard decision making regarding compliance with the new overtime law. Opting out of complying with it is out of question since this law is across the board, be it small and medium enterprises or established corporations.
Now the question remains as to whether the employees earning below the cutoff be given due overtime, or the overtime hours be limited or finally, the salaries be raised above the cutoff to escape the long term effects of the law.
Business owners that previously addressed these questions in a quite non-structured and ‘as-we-please’ kind of manner are now posed with a dilemma that they cannot escape. All three scenarios described above, in one way or the other, will require business owners to let go off at least some percentage of their profits in favor of the workforce, which this law aims to benefit. Limiting or completely eradicating overtime hours is the only way the monetary effects of the law can be avoided; the opportunity cost of this will obviously be lesser work done in a day.
- Job Role Definitions Can No Longer Be Ignored
Because of the Duties Test that this new overtime law entails, employers and business owners cannot get past loosely defined job roles; that are set to benefit their own selves. This is quite impactful in that the businesses having a larger percentage of workers will have to bear greater compensation costs. Changing the job titles and roles as per convenience no longer remains an option.
Since the Duties Test is applicable across the board, business owners now have to adhere to the standard it sets regarding the determination of job roles. For businesses that hire less administrative and executive staff, this Duties Test comes off as a red sign; either increase the staff that is exempt from the law (whose salaries are generally higher) or start loosening your pockets. Either way, the costs are set to increase for business owners.
- Far Reaching Impacts With Threshold Raise On Intervals
As briefly mentioned in the introduction, this threshold raise is not a stagnant one, unlike the past where decades would go by without an increase; which meant that businesses did not have to account for increased inflation rates and cost of living while determining the overtime pay scales for employees. Since this rule will be refreshed with partially increased thresholds every three years, businesses now have to prudently make decisions based on how they will be impacted a few years down the lane.
The reason why this worries business owners so much is its unprecedented nature; a rule of such a far-reaching disposition has not been passed ever before in context of wages and overtime. Therefore, business owners now have to think long term; getting by the current year somehow is no longer an option.
- Cutting down on non-exempt employees
Businesses may have to let go employees that are non-exempt from the law. This means a lot of time will be taken by re-structuring the way their organization works, hiring new employees and making sure that the majority staff stays exempt of overtime. Apart from the monetary setbacks that this may pose, the time factor in this scenario is the most critical and impactful.
For a business that has been run on a standard track for quite a few years, changing structure to lessen the blow from new overtime law is not an easy one. Changing structure means transforming the job roles and increasing the percentage of decision-making executive staff. This implies a complete change in functioning; which has its own costs that are unavoidable.
Therefore it is only a matter of determining which opportunity cost is lower; that of letting go employees and changing structure or that of keeping employees and paying them the due overtime.
- Lesser Flexibility
Business owners, who previously allowed their employees the flexibility to work according to their schedules and gave them the leverage to work from home, will now have to take back these advantages from the employees, impacting employee satisfaction. Because employees now have to track their work hours closely and only those hours spent at the workplace will be accounted for, business owners will now have to let go of these benefits. Such flexibilities make employees satisfied with their organization and it is less likely that they think about leaving.
Moreover, business owners show reservation over the fact that this law does not take into consideration the quality and quantity of work. Which is to say that an employee may or may not be giving his best, or may as well be spending only half the time doing the actual work, he will still be eligible based on the extra hours he spent at work. It affects business owners in that the employees may slack in work but just cash on the hours.
- Closer Scrutiny Required By The Businesses
The businesses that choose to keep employees from working more than 40 hours per week now have to keep a close check on them so that they may not spend time attending to personal engagements such as casual phone calls. Apart from being inconvenient, business owners feel that it is quite uncalled for and does not come off as something decent. Previously, the main concern used to be getting the work done, whichever way employees may find convenient regardless of time. Now that the rule applies, it has gotten trickier to keep track of how employees are working, more so in big corporations.
Moreover, some argue that you cannot have a strict distinction or wall between your personal and professional lives. There is no button that you can press to switch on or off between two aspects of your life. So it is quite difficult to stop an employee from attending calls, because business owners might not be aware of the importance it carries for the employee. Therefore, ‘keeping a check on employees’ time is not as straight forward as it sounds.
- Impact On Small Businesses
Under the new overtime law, businesses that earn less than $500,000 of revenues annually will not be required to adhere to this law. This sounds simple, but there are quite a few considerations that make this exemption less clear and simply understood. Even if the company earns under the defined scale, an employee of that company may still be eligible based on the kind of work he engages in. For example, employees that engage in commerce activities out of the state such as interstate sending and receiving of goods, looking over credit card transactions made in a similar capacity and regularly making calls and emails to keep in touch with relevant matters will still be eligible for overtime payment under the Fair Labor Standards Act (FLSA). Therefore, companies earning fewer revenues but having employees that look into out-of-state matters as part of their job will have to be paid, impacting the already limited profit margins of small businesses.
There are exceptions in the application of this law for certain types of businesses. We have already talked about small businesses in the previous section. Other than that, businesses that provide services for intellectually or physically disabled persons will have an additional period of almost three years to start adhering to the law. March 17th, 2019 is the time limit given to such businesses. Since these services are funded by Medicaid, a health coverage program run by the federal government, their funds are strictly allocated already which negates the possibility of huge profits.
Please note that this exception is made to only those service providers that have facilities of 15 or fewer beds. For facilities that have 16 or more beds, the exception has not been made.
Criticisms on the Law
Some of the criticisms being put forward on this new overtime law are listed below.
- Employers, in order to avoid the repercussions of this law, may shift their employees from being paid on a monthly basis to an hourly basis; which they believe will limit the job benefits as well as flexibility.
- Many are defining this law as an impediment to career progress since employees are encouraged to stay under the annual income threshold to be eligible for overtime.
- Employers may cut down the basic salaries of employees in order to compensate for the overtime costs that they have to bear now.
- It is a one-dimensional approach of looking into work. The time spent actually tending to the core task and how efficiently it is done is not taken into account.
It is important to note that most of the criticisms are coming from the employers and the businesses that are at the receiving end of the effects of this law. Until now, they did not have to think about making a choice between ‘work more-get paid more’ or ‘get paid less-work less’. They had an open ground to decide whether they pay their employees over time or not. This law changes the situation and compels the employers to address this pressing question which affects so many employees annually.
Although business owners still have almost five months to make adjustments according to what the law requires, many still find it difficult to adhere because of a number of factors discussed in detail above. Taking an employee-centered approach is something that typical businesses are not really used to. With the passing of this law, it has become imperative for them to do so in order to retain their workforce and not face any legal issues.