WASHINGTON — Labor experts and academics said the federal government’s expansion of overtime eligibility will raise workers’ standard of living, but retailers were less enthusiastic.
Retail experts cautioned that companies will have to adjust to a dramatic change in the way they classify and pay their employees as they try to minimize the additional costs. The Department of Labor’s new overtime regulation, unveiled Tuesday night, will double the salary threshold of workers eligible for overtime pay to $47,476 a year from the current $23,660 a year beginning Dec. 1.
The change in the salary threshold is expected to expand overtime pay and protection to an estimated 4.2 million workers who are currently not eligible under federal law. It is also expected to boost wages for workers by $12 billion over the next 10 years, according to the White House. The threshold will be tied to an index of salary growth and increase every three years.
In the context of such a sweeping change to the Fair Labor Standards Act, the impact was being analyzed widely on Wednesday as the business community and labor groups pored over more than 500 pages of new regulations. The change comes amid ongoing debate over the minimum wage and the living standards of the middle class. Both Democratic presidential candidates Hillary Clinton and Bernie Sanders have vowed to boost the middle class, while presumed Republican nominee Donald Trump also has said people should be paid more — although he has come out against the push for an increase in the minimum wage.
Under the FLSA, hourly wage workers are generally paid time-and-a-half for more than 40 hours a week if they earn below a certain salary, but a white-collar exemption has prevented many salaried executives, managers, supervisors and administrators from receiving overtime, according to the Obama administration. The threshold for overtime eligibility was set at $455 a week, or about $23,660 a year, in 2004.
Businesses groups immediately raised concerns about the impact the new rule will have on companies, with some arguing it will hollow out the middle-management tier.
“When you get that kind of mandate, whether it’s in the form of minimum wage, something like this, it changes the cost profile,” said Stephen Lamar, executive vice president of the American Apparel & Footwear Association. “It doesn’t necessarily mean you hire more people. You may end up hiring less because you have a certain amount of payroll at your disposal.”
Lamar said it will become an extra cost for companies because they will have to reevaluate how they classify workers and the jobs that those workers perform.
“It could be pretty sweeping,” he said. “A lot of people will be adversely affected, particularly in the government contract area. Everyone will have to look at wage and compensation and benefits packages to understand where workers sit to make sure they are in compliance when it takes effect. That in and of itself will be a cost.”
David French, senior vice president for government relations at the National Retail Federation, said the change in the overtime rule will “almost certainly mean more overhead costs for all employers, which in many cases will be significantly higher.”
“For everyone involved — employers and employees — it will mean more workplace red tape,” said French, adding that many workers may face a change in their employment status from salaried and exempt to hourly and nonexempt.
On the opposite side of the debate, Kelly Ross, deputy director of policy at the AFL-CIO, said workers have seen their incomes erode for decades.
“When people talk about the rules of the game being rigged and stacked against working people, they are talking about rules like this that have been allowed to be whittled away over time,” Ross said. “We’re happy someone is finally doing something about it.”
Ross argued that workers whose salaries were above the low white-collar threshold have been forced to work extra hours for no extra pay.
“What this is basically saying is if you work overtime, not only should you be paid, but you should be paid time-and-a-half, which as an incentive for employers not to overwork people,” he said.
Ross said he expects employers to react in three ways: pay their workers more for overtime, spread the work around so those who were working overtime but not eligible will no longer have to work that many hours, or increase the salaries of workers who are near the $47,500 threshold.
“Giving people a raise and more time with their family instead of being forced to work for free sounds like a pretty good deal to most people,” he said. “It’s hardly a very compelling argument forcing people to work for free and not giving them a raise or more time with their families.”
Economists, academics and legal experts generally said companies will find a way to adapt. Some argued workers’ salaries have not kept up with the cost of living for decades, which has hollowed out the nation’s middle class.
“I do think that the fears [in the business community] are probably exaggerated,” said Joshua Freeman, a history professor at Queens College, City University of New York and the CUNY Graduate Center. “There are a lot of workers today who are called management who have little discretionary power and don’t get paid very much and work very long hours, and they are going to benefit from this.”
Freeman said he also believes businesses will find a way to absorb the costs and change their pay structures.
“You may see a modest cutback in hours because of this and even a tiny bit of new hiring,” he said. “Very often, companies try to come up with more efficient ways of doing work so that workers can achieve almost as much in fewer hours. I think that will be the case.”
“In some cases, wage bills will go up,” Freeman added. “There is no question about it. That’s not simply a negative. For some companies, it may hurt their bottom line, but for some of those workers — these by definition are not high-paid workers — this may make greater economic security possible. It may increase their purchasing power. The overall effect will be positive, but without too wrenching adjustments required.”
Marick Masters, a business professor and director of labor at Wayne State University, said: “I understand the apprehension on the part of some small businesses that would raise labor costs at a time when they feel the pinch. It is difficult for businesses in general to raise prices. But at the same time, workers have experienced wage stagnation and this is one way to go about raising wages and also providing for an opportunity for workers who should receive the benefit of overtime. There has been a creep in income over time and at a certain point the salary threshold should go up to be more inclusive of workers.”
Laurent Drogin, a partner in Tarter Krinsky & Drogin and head of the firm’s labor and employment group, said he expects retailers to adjust to the regulations, although he noted that some will feel a bite in the bottom line.
“I am strangely optimistic,” Drogin said. “I think the prior base of $455 a week was artificially low. Whether you think this new base of $913 is artificially high can be debated either way. [Has the government] overcompensated here? Maybe a little. I think employers are going to have to bite the bullet here.”
But Drogin said he believes employers will be able to adjust.
“It is completely parallel to the restaurant industry and how much you can pass along to the person walking through the door,” he said. “If someone will pay an extra dollar for an item on the menu and that [compensates for] your increased cost, then no harm, no foul. It depends on what the retailer is selling and what the margin are.”
He said labor market forces will also dictate how an employer can react to the expanded overtime pay.
“Is it possible that an employer is going to say it is actually cheaper for me to cut hours, and pay by the hour and not try to [have employees] qualify for exemptions?” he asked. “That looks good on paper, but the problem is if you have someone in place for a long time, they will probably not tolerate a decrease in hours. It also may be harder to hire people to come in hard and fast to a 40-hour-per-week job on an hourly basis and get them to stay.”