How Rising Minimum Wages Will Tie Employers’ Hands on New Overtime Rules

Upcoming increases in state and local minimum wages will limit the range of responses employers will have available to comply with the new Fair Labor Standards Act (FLSA) overtime rules.

As the US Department of Labor has noted, an employer has five basic options for dealing with the estimated 4.2 million workers who will become newly eligible for overtime when the new salary minimum of $47,476 takes effect December 1:

  1. Increase their salary to $47,476 or higher to retain their exempt status;
  2. Pay them overtime for any overtime hours worked;
  3. Reduce or eliminate overtime hours;
  4. Reduce the amount of pay allocated to base salary (provided they still earn at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold their total weekly pay constant; or
  5. Use some combination of the above.

FLSA Overtime state map

In a recent Q&A session on Twitter, US Labor Secretary Thomas E. Perez said, “Employers have tremendous flexibility in how they respond to this rule.”

But as higher minimum wages begin to take effect in several states and municipalities during the years ahead, option four will not be viable for any employee working more than 60 hours in a state or municipality where the minimum wage is $13.05 or higher:

  $522.00 (40 hours of straight-time at $13.05)

+$391.60 (20 hours of time-and-a-half overtime at $19.58)

=$913.50 per week (or $47,502 per year)

Considering that one-quarter of salaried workers reported working at least 60 hours per week in a recent Gallup poll, the pool of affected workers appears to be pretty big.

The pool of affected workers would be even larger in states like California and New York where the minimum wage will reach $15.00, limiting nonexempt employees to just 54 hours per week before their overtime pay would outpace the $47,476 threshold.

Granted, there will be an adjustment to the salary minimum in 2020 and every three years after. But if recent trends in wage growth hold, these increases will not be significant.

Having It Both Ways?

It’s also worth noting that Perez cited employees who are “working 70 hours and getting paid for 40” as beneficiaries of the new overtime regulations.

Whatever one thinks of the merits of the new regulations, this rhetoric seems a bit disingenuous when Perez’s own agency is also telling employers they can simply take option four (by reducing the amount of pay allocated to base salary and adding overtime pay to hold total weekly pay constant).

In the 21 states that either don’t have a minimum wage or have a minimum wage at or below the federal minimum of $7.25 per hour, an employee working 70 hours per week could be paid as little as $32,045 per year under this pay structure.

There’s a pretty big difference between $32,045 and $47,476.

The DOL can tell employers they have flexibility, and it can tell workers they are benefiting from the new overtime rule. But the reality here is a little more nuanced.

Check out our new white paper, New Overtime Rules: Your Roadmap for Getting Ready by December 1.

FLSA Overtime Infographic_7

 

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