Update: On June 29, President Obama announced plans to raise the overtime threshold to annual wages of $50,440 in 2016.This story has been modified to reflect the proposed change.

Standards around overtime payments to employees haven't changed in more than a decade.

But get ready, because on Tuesday, the Department of Labor issued a preliminary ruling that will reset wage caps, setting the stage for a big shift in who is considered an exempt employee--potentially driving your labor costs up in the process.

The changes were set in motion by President Obama this spring, when he signed a memorandum authorizing the Department of Labor to look into revising the caps and redefining which workers are exempt, including many now considered white-collar workers. On Monday, the president said he would more than double the annual wage threshold for worker exemption to $50,440 in 2016. 

The revisions will be open to a public comment period that will last up to a year, and may be altered as a result. Congress also gets to weigh in. But for now at least, the expectation is that restaurants, retailers, and other service businesses will be disproportionately affected by the ruling, as they have more hourly and low-paid managers. Still, it's likely to be broadbased and most certainly something to which everyone will have to pay attention. After all, depending on the new caps, the changes will probably involve a number of your employees.

Behind the Rules

Here's how things stand now, as set out by the Fair Labor Standards Act. If you have workers who earn less than $23,660 a year, or $455 a week, and they work 40 hours a week, the DOL considers them non-exempt employees, and you're obligated to pay them time-and-a-half for any hours they work over that.

Of course, there are plenty of exemptions to the rules. In addition to most salaried workers, the DOL enumerates about three dozen others, including commissioned salespeople, computer professionals, drivers, farm and seasonal workers, and babysitters.

But various labor advocates, including think tank Economic Policy Institute, have been pushing to raise the wage cap, which was last increased in 2004. How high it will go is a matter of debate, and the DOL has considered three different wage thresholds, experts say. The first would have increased the cap to $42,000 annually. The second proposal, which appears to have won out, would set it at $50,000. And a third might have gone as high as $69,000 a year.

Under the proposed cap, if you're a retailer and you currently pay your assistant manager $35,000 a year, and you work your staff hard during your busy holiday or inventory season, under the new ruling you'll have to make a decision to give that person a raise to $50,440, or pay overtime. That's according to Tammy McCutchen, a partner at law firm Littler Mendelson, which specializes in employment benefit and labor law.

"The rational businessperson does the calculations, and if they decide this will eat profits, they will say I want my assistant manager to work 29 hours a week so I don't have to worry about overtime pay," McCutchen says.

McCutchen, who was an administrator in the division of wages and hours at the DOL when the 2004 overhaul was passed, currently represents the U.S. Chamber of Commerce and will draft its response to the rule change.

More than six million workers will be affected by changes to overtime laws, according to EPI, which is pushing for a $50,000 cap. One reason it's advocating for the change, EPI says, is that many midlevel workers who are salaried have no more flexibility in their work environment than hourly workers. Put another way, while they are viewed as white-collar workers, they have no more freedom than people punching a clock.

Here's one simple but elucidating metric put forth in a recent EPI study: Nearly an equal percentage of workers who earn between $40,000 and $50,000 a year compared with those who earn between $22,500 and $39,999 said they were never able to make changes to their daily starting and quitting times.

Drawbacks for Business

Increasing the wage cap is a double-edged sword, says Charley Moore, founder and chief executive of Rocket Lawyer, an online legal services company based in San Francisco and an Inc. 5000 company.

While higher caps could certainly help workers, the downside could be pressure to scale back on pay and benefits, as well as flexibility in scheduling.

The startup world, where workers, particularly engineers, can easily log 100-hour weeks, is also known for its forward-thinking benefits policies. Moore's 200-person firm, for example, offers unlimited vacation to its salaried workers, like many other Silicon Valley companies.

Such benefits could disappear for some lower-earning salaried workers, under the new paradigm, Moore says.

"The technology companies don't care about how much vacation you take anymore, because the creative economy is not about how much time you put in, but what you do with the time you put in," Moore says. He adds that regulators should tread lightly in the overtime issue, and others that could affect company productivity.

At the other end of the spectrum, companies such as Kids Connection Learning Center, a day care center in suburban Philadelphia, would reconsider increasing wages and hours going forward. All of the company's 49 workers are paid by the hour, and most earn below the federally mandated overtime threshold of $23,660.

Increases to the overtime threshold would make Kevin Crane, the company's owner and co-founder, think twice about expanding employment opportunities to workers.

"I most likely would not consider placing any staff into salaried positions," Crane says. "And I wouldn't be surprised if some business owners resort to changing salaried employees statuses from full time to part time in order to save on the expense."

Published on: Jun 8, 2015