Currently, employers are not required to pay overtime to certain managers and administrators if they work over 40 hours a week, as long as the employers classify these managers and administrators as salaried employees, and as long as these managers and administrators make more than $23,660 per year - about $455 per week.

That is likely all about to change, though. The Obama Administration is proposing a rule that would more than double that wage floor to $50,444. In other words, any employee currently classified as a manager or administrator and being paid on salary (exempt from overtime), would now need to be paid a minimum of $50,444 a year in order to remain classified as salaried.

Any manager or administrator on salary earning less than $50,444 a year would be required to be recategorized as non-exempt, meaning that employers would be required to pay overtime to those employees for anything over 40 hours per week.

The proposed rule would thus affect millions of workers with managerial or administrative duties who currently make between $23,661 and $50,443, and who are currently salaried and exempt from overtime.

In specific, the Department of Labor estimates that 4.6 million employees would be affected. However, other organizations, such as the Economic Policy Institute, estimate as many as 15 million.

While larger companies tend to properly classify their workers from the start, smaller companies, since they rarely have HR departments with experienced specialists, are more likely to misclassify them.

Still, one of the biggest effects of the proposed rule will be on companies that have properly classified employees as exempt, but pay them less than the proposed threshold of $50,444. The options are to reclassify them as hourly (and pay the required overtime for work over 40 hours a week) or increase their salaries to $50,444 or more in order to maintain the exemption.

Since it is unlikely that employers paying salaried workers, say, $30,000 or $40,000 a year are going to increase their salaries to $50,444, it is more likely that these employers will convert these salaried employees to hourly workers.

"Most workers would be unlikely to see an increase in take-home pay, the use of part-time workers could increase, and retailers operating in rural states could see a disproportionate impact." said the National Retail Federation (NRF) in a press release.

The problems in specific? Certainly, there would be problems for employers having to pay the extra overtime (discussed below). However, there would be problems for the employees who are being reclassified.

For one, the shift from salaried to hourly could remove these employees from career tracks that they consider important to their futures. That is, employers might centralize oversight responsibilities with higher-level managers, thus cutting down on the number of pathways for lower-level managers to advance their careers. "Promoting someone to manager is going to be an expensive proposition for many small businesses, and the result will be less mobility and fewer opportunities for workers at the bottom," said Beth Milito, senior legal counsel for the National Federation of Independent Business.

A second problem for employees is that, with employers being required to pay overtime for over 40 hours a week, the employers might consider reducing benefits packages for these workers as a way to compensate for the extra dollars they will be required to pay in overtime wages.

"Many reclassified employees will lose benefits, flexibility, status, and opportunities for advancement," said Randy Johnson, senior vice president of Labor, Immigration, and Employee Benefits for the U.S. Chamber of Commerce. "This change is another example of the Administration being completely divorced from reality and adding more burdens to employers and expecting them to jut absorb the impact."

What are the problems for employers themselves? "Overtime expansion would drive up retailers' payroll costs while limiting opportunities to move up into management," said David French, senior vice president of government relations for the NRF, in the press release. "The administration seems to be under the distorted impression that they can build the middle class by government mandate. There simply isn't any magic pot of money that lets employers pay more just because the government says so."

Ted Pitts, president and CEO of the South Carolina Chamber of Commerce, quoted in an article in The Herald newspaper (Rock Hill, S.C.), said the proposed regulations will increase costs for business. "Government-mandated wage increases force employers to make adjustments for added costs to conduct business, such as reducing hiring, cutting hours, reducing benefits, and/or increasing prices for goods," he said.

As to the status of the proposed rule, the Administration can enact the rule through regulation. However, the Republican-run Congress can also seek to counter it through legislation. At this point, the rule will not take effect until after a 60-day comment period. "It is very difficult to stop a regulatory change, short of a statutory amendment," said Lisa A. Schreter, co-chair of the wage and hour group at the law firm of Littler Mendelson, in an interview with the Albuquerque Journal.

If nothing changes, the Department of Labor expects the final rule to go into effect in 2016.

Instant Insights /

Administration's proposed rule on overtime pay challenging for small business

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