On June 30, 2015, the U.S. Department of Labor released its long-awaited proposed rules making some drastic changes to the way overtime exemptions are applied under the Fair Labor Standards Act. Under rules last updated in 2004, a worker earning at least $455 per week ($23,660 annualized salary) is exempt from federal overtime requirements assuming the worker meets the “duties” component of a particular exemption such as the executive, administrative, or professional exemption. The proposed rule more than doubles that minimum salary to $921 per week ($47,892 annualized salary).
On the surface, this adjustment seems like a boon for American workers. It is being reported that this new rule would make an additional 5 million workers eligible for overtime pay. And, the administration is selling the new rule as a way to put more money in workers’ pockets and to ensure that the economic pie is more equitably shared between labor and management. Labor Secretary Tom Perez is even calling the new rule a $1.5 billion raise for American workers! Ironically, however, while the rule would make more employees eligible for overtime pay, it might result in workers being worse off than before.
Other than requiring the payment of the minimum wage, federal (or for that matter state) law does not regulate the wage rate employers must pay employees. That rate, instead, is set by the parties’ agreement. While that agreement could be enshrined in a written contract, for most workers their wage rate is set by the employer announcing what the rate will be. Absent a contract, the rate can be changed at anytime — up or down. Just as it is not unlawful for an employer to raise a worker’s salary — it is equally lawful for an employer to reduce a worker’s salary.
Thus, to comply with the new overtime rule an employer would have a number of options. It could, of course, raise workers’ wages to meet the new minimum salary to maintain the overtime exemption. Alternatively, it could leave workers’ salaries where they are and pay overtime premiums for hours worked over forty in a workweek. Both of those reactions would benefit employees with higher take-home pay or at minimum more hours of leisure time at the same salary. What a deal! With the mere wave of the administrative wand, workers will earn more money and have more free time. It sounds almost too good to be true. And it is. Employers need not react to the new rule with such generosity. Instead, employers could react in at least two ways that would leave workers worse off than before the new rules.
First, an employer could simply reduce an employee’s salary such that when the overtime premium is paid the worker makes the same as before. For example, imagine a store manager who is paid a $500 weekly salary and who regularly works 50 hours a week, 10 hours of which considered overtime hours. Under the new rules, that manager would be entitled to overtime and would, if the employer did not adjust salary, earn an additional $50 per week. Magic! But, not so fast. By reducing the manager’s salary to $450 per week, the manager under the new rules earns only $495 per week after overtime is calculated.
Thus, the employer pays no more, the manager earns no more, and the manager works no less. That of course assumes that the manager worked at least 10 hours of overtime. If she did not, she would not be entitled to overtime and would actually earn less because coming up to her former salary now requires that she works 10 hours of overtime.
Second, an employer could comply with the new rule by converting salaried workers to hourly workers. Let’s revisit our store manager. Prior to the rule change, she was effectively earning $10 per hour ($500 per week for 50 hours worked). By converting her to an hourly employee and setting her hourly rate at $9.10 per hour, the employer would pay $500.50 for the same 50 hours of work. Never mind the $.50 in additional pretax weekly earning, our manager would be in a much worse position. As an hourly worker, she would now be punching a time clock and only be paid for hours she actually clocked. If she had to leave to run an errand or to pick a sick child up from school early, she would not be paid for that time. Not only that, she would lose the status usually associated with salaried work, as opposed to hourly work.
Thus, this new rule would incentivize employers to take away the flexibility, stability, and notability that come from earning a guaranteed weekly salary and to replace it with the uncertainty of an hourly wage. And, that trade off could come with little or no additional take home pay for the employee.
But don’t just take my word for it. The Department of Labor’s own Notice of Proposed Rule Making explains how this is a real possibility for some workers. While certainly not every employer will be inclined to react this way out of either loyalty to her employees or inability because of a tight labor market, many employers focused on maintaining profits will react this way and there would be nothing unlawful about it.
No one doubts the nobility of President Obama and his Department of Labor’s attempt to help American workers provide for their families. On the surface, this proposed rule looks like it requires employers to share more of the economic pie with their workers. That is certainly how it is being sold today. But, what is being billed as great deal for working Americans may turn out to be something much less. As if often the case, there is no such thing as a free lunch (or slice of the pie).
Mr. Mastrosimone is an Associate Professor of Law at Washburn University School of Law in Topeka, Kansas, which was recently ranked number 24 in the nation for full-time attorney job placement.. He teaches labor law, employment law, and legal research and writing in Washburn’s often nationally ranked legal research and writing program. Prior to teaching, he was the Chief Legal Counsel for the Kansas Human Rights Commission, legal counsel at the National Labor Relations Board, and represented management in labor and employment disputes at two national law firms.