Yesterday the US Department of Labor published a long overdue update to the salary threshold for overtime exemption. The simplified explanation of the new rule is this: if you are paid on a salary basis and make less than $47,476 per year or $913 per week your employer has to pay you overtime in addition to your salary for every hour worked over 40 in one work week. Under the old rule, the salary threshold was $23,660 per year or $455 per week. The new rule takes effect on December 1, 2016.
The more complicated explanation of the new rule involves understanding the reason for requiring overtime pay in the first place and why some people are exempt from that requirement. The purpose of the overtime requirement- or rather, maximum hours requirement- was to bring employees a better work-life balance by discouraging employers from requiring their employees to work long hours. The Fair Labor Standards Act sets the maximum hours for a workweek at 40, but allows employers to require additional hours as long as they pay more for that time. Some higher status employees were exempted from that requirement because, presumably, their decent salaries already compensated them for the extra time. In 1975 the salary threshold was updated by the Ford administration to be 1.6 times the median wage, ensuring that those employees who were not entitled to overtime were still being fairly compensated.
USDOL used to periodically update the salary threshold, but since 1975 it has only been updated once, in 2004. The value of the threshold has eroded over time due to inflation and efforts by business groups to keep it low so that it no longer serves its purpose of ensuring that exempt employees are getting fairly compensated for extra work. Instead of providing an incentive to limit hours to 40, employers had an incentive to pay everyone on a salary and increase their responsibilities so they could have them work well over 40 hours and not have to pay overtime. At $455 per week, you could be earning barely above a poverty wage for a family of four and not be entitled to overtime. That simply is not how the law was intended to work.
That is why the Obama administration called for USDOL to increase the salary threshold – because it was violating the spirit of the overtime requirement. Under the new rule, the salary threshold is pegged to the 40th percentile of the poorest census region (the south) and will be automatically updated every 3 years. This is particularly good news for the middle class- a group that has seen long term wage stagnation even as the economy has grown. Now, being a salaried manager at a restaurant or retail store will mean you are actually getting paid a middle class wage. In North Carolina, an estimated 156,000 salaried workers will now be entitled to overtime or get a raise- putting money into hard working North Carolinians’ pockets.