The U.S. Department of Labor periodically adjusts the salary threshold for paying overtime. The adjustments are made to reflect the realities of our cost of living; how much it costs to pay our mortgages or rent, make car payments, buy groceries and clothes, etc. The salary threshold sets the salary figure relative to workers’ eligibility to receive overtime for hours worked over 40. If an employee receives a salary at or over the threshold, then they do not get overtime. If it’s below the threshold, then they are eligible. The idea is that salaried employees are typically earning annual pay that is more than hourly workers and supports the standard of living commonly thought of as the “middle class.”
The salary threshold is being increased to $47,476 from the current $23,660 – a number that hasn’t changed for 12 years. Today, earning $23,660 is not considered middle class. For example, the DOL defines poverty as earning $16,020 for a couple and $24,300 for a family of 4. According to the Labor Department, 4.2 million additional workers will be eligible to receive overtime pay for each hour they put in beyond 40 a week.
So what does this mean to companies? One option is workers who are earning less than $47,476 will now be paid as hourly employees and will need to track their hours. If they typically worked more than 40 hours a week, they will receive time-and-half for each hour worked over 40. This is the desired effect of the change and the point of raising the threshold from $23,660 to $47,476.
A second option for companies is to maintain current pay rates of their salaried employees, but monitor their hours and prohibit working extra hours – that is more than 40. This means the worker is effectively getting a raise, and the company is losing production. More workers will be needed to produce the same out it of goods or services. This, too, is the desired effect of the change – to create more jobs. The overtime law was enacted in response to the Great Depression in 1929 and was a “job creation” law. The idea was to encourage business to hire a second worker rather than use the first worker to work beyond full time. A second worker means another employed person who could pay for housing, support a family, buy goods and services, etc. As the past ten years so dramatically reminded us, the American economy depends on full employment.
A third option is a business can raise its salaried workers’ base pay to the new threshold to avoid paying overtime. Again, mission accomplished. If $47,476 is middle class, the economy and country just got one more middle-class worker and citizen.
Finally, raising the threshold still leaves each business owner in charge of whether they are better off with a salaried worker earning $47,476 or paying overtime if the worker puts in more than 40 hours a week. There is nothing in the law forcing a company into one of the above specific options. Competition depends on business owners having the operational freedom to exercise choices as to their labor.
That freedom, however, cannot be exercised in a false reality in which we pretend $23,660 is middle class.