Come December, your paycheck might look a little different, and we’re not just talking about that year-end bonus.
The U.S. Department of Labor’s new overtime rules are creating a lot of buzz — and for good reason. They could represent a major bump in compensation for many salaried employees who put in more than 40 hours of work per week.
Currently, the rules grant overtime pay to people who gross a salary of less than $23,660 per year on the time that they clock in beyond 40 hours in a given workweek. The big change here is that on December 1, 2016, that salary benchmark will jump to $47,476. In other words, employees who earn less than $913 per week will soon be eligible for time-and-a-half overtime pay.
The U.S. Department of Labor expects the new rules to impact more than 4 million workers within the first year of implementation.
But the truth is, the rules are a little tricky. Here's an expert breakdown.
Breaking Down the New Overtime Law Change
How does overtime pay work? Under the Fair Labor Standards Act, a non-exempt employee (that is, an employee who qualifies for overtime) must receive time-and-a-half pay for any hours worked beyond 40 hours in a week. Workers become exempt (or ineligible for overtime) if their job passes both a duties test and a salary test.
If your position passes the duties requirement, this means it involves the responsibilities (as defined by the Labor Department) of an executive, administrative, professional, computer or outside-sales employee. This may mean you have the authority to hire and fire, you work with computer software or systems in certain capacities or you make sales with clients and work primarily outside of your company's office.
This part of the overtime rules isn’t changing. What is changing is the second part; the salary threshold, which is more than doubling.
“The main group that the Labor Department concluded was going to be affected by this are people who have the title of ‘Manager’ or ‘Assistant Manager’ in retail or service operations,” because of what their responsibilities entail and where their typical pay falls, says Jane Lauer Barker, a labor attorney and partner at Pitta & Giblin LLP in New York City. But any position that can’t pass both the duties and salary tests will now be fair game for overtime pay.
If you fall into the non-exempt camp, Barker says that determining your overtime pay is fairly simple. Let’s say your annual salary is $47,000, or $903.85 per week. To calculate your hourly rate, divide your weekly pay by 40. This means that your regular rate of pay for one hour of work is $22.60. If you work beyond 40 hours, then you’re entitled to one and a half times that rate—or $33.90 for every hour of overtime you put in.
The new overtime laws could be quite costly for employers, so don’t be surprised if your company makes some changes to avoid signing everyone up for overtime. “I think employers’ biggest concern here is how to manage their labor cost, because this is a large jump,” Barker says.
4 Ways Your Paycheck Could Change
So how might your employer respond? There isn’t a one-size-fits-all answer, but Barker says that one of the following four scenarios will likely play out:
1. You could get a small pay bump, especially if your salary is just below the new threshold. This would effectively make you exempt from overtime pay and might be more cost-effective for the company. (I’m assuming this will be the case for my husband, although we still don't know for sure. Since his company hasn't approached him with the details yet, I'm nudging him to reach out to his HR rep for clarification on what to expect.) Any hours worked in excess of 40 a week may not warrant overtime pay.
2. Your employer may keep your current pay in place and no longer allow you to work overtime. This means that once you hit your 40 hours, your workweek is officially over. Instead, extra work may be distributed to other employees or more people might be hired to even out the workload.
While this option means you won't be bringing in extra cash for the overtime hours you’d normally work, more free time could mean opportunities for other income-earning pursuits—such as taking on a separate part-time job, launching a side gig or enrolling in academic or professional development classes to advance your career.
3. Your employer could change your pay from salaried to hourly, with the option for overtime hours. “If you’re not exempt from receiving overtime pay, then the employer would be well within its rights, given the new salary cutoff, to change that employee to be paid hourly,” Barker says. “Presumably, the employer would maintain the pay of the employee by ensuring that the hourly rate times 40 hours would be close to what the employee is being paid now [in salary] and then just be prepared to pay overtime for work in excess of 40 hours.”
The flip side of this is that there could be weeks when you work less than 40 hours, which would mean less pay than your prior weekly salary. And if you're banking on pulling overtime to make up for those lost hours, keep in mind that the ability to do so will be at the discretion of your manager, says Susan M. Heathfield, an HR expert, management consultant and company owner who writes the HR site for About.com.
In a possible worst-case scenario, an employer could establish a lower hourly rate than what you’d get by dividing your weekly salary by 40. Since you'd be making less per hour, you'd likely have to continue working overtime just to maintain your prior salary pay.
4. Now for the potentially best-case scenario: Your employer, having recognized that you will no longer pass the salary test under the new threshold, will grant you overtime pay. “HR may say to you, ‘We’ve wanted to reclassify your job [to grant overtime] for a long time, but it’s always been such a hassle with the IRS that this gives us the perfect opportunity to do that, and we’re excited,’” Heathfield says. “I don’t think there will be many [employers] in that category, but I do think there will be some.”
If you qualify for overtime, your take-home pay may be affected in one of two ways—you’ll either get a pay raise to put you over the new salary threshold (as we discussed in option one), or you’ll start bringing in extra cash for the additional hours you work. Those who expect to be impacted might want to take a fresh look at their budgets and start making plans for how to best allocate those funds.
How to Navigate These Changes at Work
Since the new rules are a lot to digest, Heathfield suggests sitting down with your HR rep to iron out the details. “If you’re in any kind of job that qualifies for these new overtime regulations and your HR department has not approached you about being reclassified, I would definitely approach the HR department,” she says. “The key is to have the conversation [with your HR staff] to determine how they have decided to handle it.”
While the new overtime rules may seem like only a good thing for workers, there are some who are concerned about a potential negative impact on their careers. For instance, Cathie Richards, a 23-year-old assistant account executive in Fort Atkinson, Wisconsin, is worried about the impact of a limited workweek.
“I’m in my first job out of college, and I understand that I have to put a lot of work into my job because I’m still learning everything,” she says. “I’m worried that my hours will be limited because my employer won’t want me to work a lot of overtime.”
Other groups who are—and will continue to be—exempt from this standard include teachers, physicians, attorneys, police and first responders, among others. “They’re covered by separate exemptions, and this increase in salary threshold does not affect them at all,” Barker says.
Those who do qualify are advised to keep close track of their weekly hours to prevent any potential discrepancies. “The important thing for the employees, as well as employers, is to ensure that good record-keeping is taking place,” Barker says. “So just like employers, employees should also be keeping track of their hours to have a sense of whether they’re working more than 40 [hours] or not. And they should understand completely whether their job is going to be considered exempt.”
One other thing to look out for is if your employer ever asks you to do any off-the-clock work without pay, which is obviously in violation of labor laws.
Time will tell exactly how these new overtime rules actually play out. For example, legislation has been introduced to initiate a three-year phase-in for businesses to meet the new $47,476 overtime threshold, instead of making the jump by December. In the meantime, it's a good time to get all your ducks in a row well before winter rolls around and start conversations with your manager and HR so you know how your pay—or duties—could be impacted.