Explaining Obama Administration s Overtime Expansion Proposal for Department of Labor s Overtime Exemptions

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1 Explaining Obama Administration s Overtime Expansion Proposal for Department of Labor s Overtime Exemptions PowerPoint presentation via National Journal National Journal Presentation Credits Producer: Christine Yan Director: Afzal Bari

2 Employees Satisfying Certain Duties Tests May Be Exempt From Overtime Pay Key Definitions for Understanding Overtime Exemptions EAP Employee HCE Employee Salaried employees making less than $100,000 annually whose duties meet guidelines set by the Department of Labor which classifies their role as Executive, Administrative, or Professional. Highly Compensated Employees are classified as such if their annual compensation is $100,000 or greater. Executive Duties Test Administrative Duties Test Professional Duties Test HCE Duties Test All of the following must be satisfied: Primary duty is managing the enterprise or subdivision of the enterprise Regularly direct at least two fulltime employees Have authority or significant influence in hiring decisions All of the following must be satisfied: Primary duty is office or nonmanual work related to management or general business operations Primary duty requires use of discretion and independent judgment All of the following must be satisfied: Primary duty is intellectual in character and requires advanced knowledge in a field of science or learning Advanced knowledge is acquired by a prolonged course of specialized intellectual instruction Employee must regularly perform at least one of the duties of an EAP employee Salaried employees classified as EAP or HCE employees may be exempt from overtime pay under the Fair Labor Standards Act if their salary falls above a certain threshold and if they satisfy one of the Executive, Administrative, Professional, and HCE duties tests In June, the Obama administration s Department of Labor proposed raising the overtime exemption threshold to $970 (weekly compensation) for EAP employees and $122,148 (annual compensation) for HCE employees An increase in the thresholds would make fewer employees exempt from premium overtime pay Source: US Department of Labor Wage and Hour Division, Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act.

3 Obama Administration s Overtime Expansion Proposal Doubles Salary Threshold for EAP Exemption Who Is Exempt from Overtime Pay Under DOL Regulations Type of Worker Current Threshold and Status 2016 Proposed Threshold Change Hourly Nonexempt Nonexempt No changes Salaried: HCE $100,000 per year or more Exempt Less than $100,000 per year Nonexempt $122,148 per year or more Exempt Less than $122,148 per year Nonexempt 22% increase in threshold Salaried: EAP $455 per week or more Exempt Less than $455 per week Nonexempt $970 per week or more Exempt Less than $970 per week Nonexempt 113% increase in threshold Salaried: Neither Nonexempt Nonexempt No changes Under DOL regulations, all workers are entitled to premium overtime pay for each hour worked above 40 hours a week until found to be exempt; President Obama s proposal doubles the weekly salary threshold for EAP employees exemption from $455 to $970 and increases the annual salary threshold for HCE employees exemption from $100,000 to $122,148 The proposal also advocates automatically adjusting exemption thresholds in the future such that the threshold for EAP workers is set as the 40 th percentile of full-time salaries, and for HCE workers as the 90 th percentile of full-time salaries Source: Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, July 6, 2015

4 Weekly Salary Threshold for EAP Overtime Exemption Has Eroded Over Time Due to Inflation Historical Weekly Salary Threshold for EAP Exemption Adjusted for Inflation Proposed 2016 Threshold The weekly salary threshold for the EAP exemption has been updated 7 times since its inception in 1938; however, it s only been updated once since 1975, and not enough to bring the threshold up to previous levels after accounting for inflation Inflation essentially repeals regulations, making it necessary to continuously adjust the salary threshold Historical real values of the threshold have also aimed for the proposed 2016 level ($970) as the cutoff for exemptions. Past increases have either brought the threshold up to this level (pre-1960) or occurred when the decline hit this level (highlighted portion of graph) Source: National Journal Research; Ben Gitis, Primer: Overtime Pay Regulation, American Action Forum, November 20, 2014; Bureau of Labor Statistics.

5 The Department of Labor Estimates 1.2 Million Employees Would See Wage Increase From New Overtime Regulations Estimates for Number of Currently Exempt Employees Who Would Gain Overtime Benefits EAP Employees 4.6 mil employees newly eligible 21% 4% 988,000 employees regularly work overtime 180,000 employees sometimes work overtime HCE Employees 36,200 employees newly eligible 40% 3% 14,500 employees regularly work overtime 1,000 employees sometimes work overtime Assuming no response from employers (i.e. reclassifying employees), around 4.7 million HCE and EAP employees would become newly entitled to overtime pay, but the Department of Labor has found that only 1.2 million of these employees work overtime and would see their pay increased due to the rule change Labor Secretary Thomas Perez estimates that in total, employee compensation would increase by $1.3 billion a year However, these numbers are unrealistic, as employers responses to the regulation changes would likely affect employees eligibility Source: Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, July 6, 2015, Christine Mai-Duc, Obama s New overtime Rules: How They d Work and Who They d Affect, Los Angeles Times, June 30, 2015.

6 Estimates of Overtime Pay Proposal s Impact Vary Different Estimates Of Employee Benefits and Employer Costs Resulting From Overtime Changes Number of Workers Who Benefit Department of Labor: 4.7 million Economic Policy Institute: 13.5 million American Action Forum: more than 2.6 million (excludes employees who don t work overtime) Goldman Sachs: 120,000 (new hires for jobs created from reduced hours) Administrative Costs for Employers (first year) Department of Labor: $593 million National Retail Federation: $745 million (for retail and restaurant industries alone) Because there is no data source for the number of EAP overtime pay-exempt employees, estimates for the number of workers who would be affected by the new rules greatly differ depending on the methodology used Economic Policy Institute s estimate of the number of workers who directly benefit from the changes is much higher than the Department of Labor s estimate because EPI includes an estimate of 8.1 million workers who would have their overtime protections strengthened due to the increased threshold Source: Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, July 6, 2015, National Retail Federation, Rethinking Overtime, Ben Gitis, Primer: Overtime Pay Regulation, American Action Forum, November 20, 2014, Ross Eisenbrey and Lawrence Mishel, The New Overtime Salary Threshold Would Directly benefit 13.5 Million Workers, Economic Policy Institute, August 3, 2015.

7 Employers May Respond to New Overtime Regulations With Cost-Cutting Measures Possible Actions Employers May Take and How Employees Would be Affected 1. RECLASSIFY SALARIED WORKERS AS HOURLY WORKERS Guaranteed overtime pay, but average hourly wage may be lowered in order to keep total weekly compensation constant, and benefits may be reduced to offset employer administrative costs Less flexibility, unlikely to be able to work remotely due to hour-tracking requirements Fewer opportunities for advancement 2. REDUCE HOURS TO AVOID OVERTIME PREMIUMS Limited to 40 hour workweek Less flexibility, unlikely to be able to work remotely due to hour-tracking requirements Reduced bonus/benefits/base wages to offset employer costs 3. INCREASE SALARY OF EMPLOYEES NEAR THRESHOLD Employees with salaries slightly below the threshold may have their salaries increased to keep them exempt from overtime pay Bonus/benefits may be reduced to offset the salary increase Because employers, especially small businesses, are almost guaranteed to enact cost-cutting measures in order to offset administrative and payroll costs due the new regulation, employees are likely to lose in at least one aspect, whether it be reduced bonus, benefits, flexibility, or hours Some employees may be reclassified as hourly workers and see a hourly wage reduction, while some employees with a salary near the new threshold may see their salary increased so that their employers can avoid paying overtime premiums Source: Corey Stern, Goldman Sachs thinks new overtime pay rules could increase total employment but do nothing for wage growth, Business Insider, July 7, 2015.

8 Critics of Overtime Expansion Proposal Point to Unintended Consequences for Both Employees and Employers What Supporters and Critics Say About Obama Administration s Overtime Proposal Supporters Employers will cut hours in response to the higher threshold, but this will add jobs as overtime hours are spread around. - UC Berkeley s Center for Labor Research The proposal will reverse decades of wage decline. - National Employment Law Project The changes will provide a necessary boost to the economy, but this is just a first step. - AFL-CIO In the end, most employees will likely come out ahead due to the overtime premium even if base wages decline. - Brookings Critics Regulations hurt small businesses and employees will lose hours, benefits, advancement opportunities, and work flexibility. - U.S. Chamber of Commerce Overtime expansion will lead to lower base wages, loss of work flexibility, and reclassification of salaried workers to hourly workers. - Heritage Foundation Most employees won t see a change in net income, and administrative expenses alone (updating payroll systems, creating hour tracking methods) would cost restaurant and retail industries $745 million. - NRF Oxford Economics Study Very few people will benefit from the rules, and research suggests that the changes will lead to part-time work replacing full-time work. - American Action Forum Many business groups and much of the Republican party have expressed disapproval of the Obama administration s overtime proposal While supporters recognize some of the unintended consequences of the change that critics emphasize, such as reduced hours of existing employees, they argue that this will lead to job creation and ultimately boost the economy Both supporters and opponents expect the proposal to be challenged in courts and by Congress Source: Tanya Basu, What to Know About Obama s Overtime Pay Announcement, TIME, June 30, 2015, Ben Gitis, Primer: Overtime Pay Regulation, American Action Forum, November 20, 2014, James Sherk, Salaried Overtime Requirements: Employers Will Offset Them with Lower Pay, Heritage Foundation, July 2, 2015, National Retail Federation, Rethinking Overtime, U.S. Chamber of Commerce, U.S. Chamber Statement on Obama Administration s Overtime Proposal, June 30, 2015, Christine Mai-Duc, Obama s New overtime Rules: How They d Work and Who They d Affect, Los Angeles Times, June 30, 2015, AFL-CIO, President Richard Trumka Applauds Overtime Expansion Proposal, June 30, 2015, Harry J. Holzer, Overtime Pay Will Boost America s Wages, Brookings, July 2, 2015.

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