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21 states and the US Chamber of Commerce fight new federal overtime rule

Led by Texas and Nevada, 21 states and the U.S. Chamber of Commerce are challenging the Department of Labor's new overtime rule scheduled to take effect on December 1. Created at the urging of the Obama administration, the DOL regulation raises the overtime floor for salaried employees from $23,660 to $47,476, meaning that all employees earning less than the overtime threshold (which will cover approximately 4.2 million workers previously exempt from earning overtime) will be eligible to receive overtime pay. The rule also sets guidelines that would help clarify which employees qualify for an exemption to overtime rules under the Fair Labor Standards Act (FLSA) and provides for automatic increases to the salary threshold every three years.

Those suing the DOL for doubling the income standard claim that the new rule will force employers, including state and local governments, to substantially increase their employment costs and ignores Congress' intention to determine overtime eligibility based on an employee's job "activities" rather than salary level. While the Obama administration views the change as a way to put money in the pockets of workers nationwide, critics say the jump could have detrimental effects on small businesses and a negative impact on employees. This past June, the U.S. Supreme Court ruled that it could not rely solely on the DOL's interpretation of the FLSA, leading to an opening for states and the U.S. Chamber of Commerce to file a lawsuit.

Potential impact for salaried workers

As with any regulatory rule involving wages, employers and employees must determine how it affects their bottom line. Employers are already considering taking actions in the wake of new rules. For example:

  • For some companies, it may be in their best interest to increase the pay for managers or other currently overtime-exempt employees to meet the new threshold, particularly if their salary is close to the new threshold anyway.
  • Another strategy may be to actually reduce the earnings of certain salaried employees and pay their overtime in an effort to have the final tally balance out. If this is the case, however, employers must be sure to pay the full amount of OT owed to all workers. Failing to pay all OT owed can lead employees to file lawsuits for unpaid wages.
  • A third option for employers could be to bring in lower-paid part-time help for non-professional or clerical duties, reducing the number of hours their overtime eligible employees work.

Employers should keep in mind that this rule only impacts employees who would otherwise be exempt from receiving overtime pay. Even if an employee earns more than the new threshold amount per year, the employee could still be entitled to overtime based on his or her job duties.

The full effects of the new rule, if upheld, remain to be seen

Some companies have set grueling hours for managers in industries such as fast food and retail, although the pay can be relatively low. The Obama administration's goal in advancing the new rule is to increase pay for such workers.

It remains to be seen how the rule will affect small businesses. The National Federation of Independent Businesses has already petitioned for a six-month extension on behalf of small companies. They argue the rule will cause businesses to eliminate upwardly mobile managerial positions and burden companies with the cost of tracking and reporting hours. The NFIB also points out that the higher wages could force employers to reduce health benefits.

Legal implications

The new overtime rule will likely cause considerable changes with regards to which employees are eligible to receive overtime pay. Both employers and employees affected by the rule will have to start keeping track of hours, provided the rule is upheld by the U.S. Supreme Court. Missteps in calculating hours and overtime pay could very well result in work-related litigation involving unpaid overtime.

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