How the New Overtime Pay Rule Will Hurt the Middle Class

The U.S. Department of Labor has updated Fair Labor Standards Act (FLSA) overtime regulations, raising
the threshold at which salaried employees are exempt from overtime pay, effective December 1, 2016. Salaried employees making up to $913 per week ($47,476 annually) will qualify for overtime compensation at one-and-a-half times their normal pay. This is a significant increase from the previous exemption level of $455 per week ($23,660 annually). The FLSA also defines the job duties of employees who are exempt from overtime pay. The “duties test” exempts employees who are executive, professional or administrative and also work independently, exercising their own judgment without close supervision. This remained unchanged.

The administration predicts the new rule will put $12 billion in the pockets of 4.2 million newly eligible employees over 10 years, but it will cost the restaurant and retail industries alone over $2 billion annually. [See Figure I.] It is inevitable that businesses will make changes to their compensation model to offset these costs.

An Oxford Economics case study of the restaurant and retail industry outlined three possible ways employers may offset increased costs: lowering hourly wages, cutting benefits and bonuses, and reducing workers’ hours.

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