Overtime Rule Delayed, But Not Reversed: The Impact So Far

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Jan 3, 2017
This article is part of a series called Opinion.

In May of 2016, the U.S. Department of Labor announced that it would raise the salary threshold set by the Fair Labor Standards Act, above which workers are ineligible to receive overtime pay — more than doubling it from $455 a week ($23,660 a year) to $913 a week ($47,476 a year). Employers had up until December 1 to prepare for the new rule by raising salaries or taking other measures to defray costs. However, on November 22, just nine days before the rule was set to take effect, a federal judge issued an injunction blocking the implementation of the rule, raising the prospect that the courts will eventually strike down the rule change. From the legislative and executive sides, too, the rule faces an uncertain future under the Trump Administration.

The Impact So Far

Our findings suggest that even without an official rollout, many newly hired U.S. workers have already received a salary lift. In our latest Hiring Trends Report, we looked at the distribution of salary ranges for new hires in the iCIMS system, comparing data from across the U.S. by industry, city, and company size, and found that many companies appear to have already prepared for the change, before the rule was blocked by the court injunction.

If the rule change survives the legal and political challenges ahead, the scope of its impact will be even more significant. Within iCIMS’ system data for full-time employees, we found that about 35 percent of new hires’ salaries would be eligible for overtime pay — in line with government estimates. That’s a big leap from the 7 percent coverage of recent years, but still well below the 60 percent in 1975. Over prior decades, inflation and shifts in the workforce have eroded the rule’s coverage, although workers have seen wages rise over the last few years as the labor market has tightened.

What This Rule Change Means for Hiring Professionals

This was the first increase in the overtime threshold in more than 10 years, and many businesses are concerned about how it would affect their labor costs. Under the FLSA, salaried workers eligible for overtime pay receive 1.5 times their regular hourly wages for hours worked beyond 40 per week.

If some form of the new overtime rule is eventually implemented, employers will face a number of options. Among other things, they could avoid paying more overtime by limiting employees’ hours, converting them from salaried to hourly pay, or raising their salaries above the new threshold. The trick is that whatever they do will affect not only the bottom line of labor costs, but also staff morale.

Who Would Be Most Impacted By a Change in the Overtime Threshold in the Future

Unsurprisingly, the five cities with the highest proportion of salaried new hires that would be eligible for overtime pay are cities where a lower cost of living implies lower salaries overall: Cleveland, Salt Lake City, Tampa, Phoenix, and Las Vegas. On the flip side, the five cities with the lowest proportion of salaried new hires that would be eligible for overtime pay are cities where a higher cost of living requires higher salaries overall: San Francisco, Washington D.C., Boston, Los Angeles, and Austin.

The larger the business, the higher the proportion of newly eligible workers. The largest proportion of total eligible salaries (both newly eligible and already eligible) occurs in the largest “enterprise” businesses, reflecting their reliance on many low-level workers with modest salaries. The smaller the company size, the lower the proportion of new hires who would be eligible for overtime pay.

Which Companies Have Already Been Adjusting Salary Levels

Certain industries have reduced their exposure to the new rule each of the last two years, including financial activities, manufacturing, and leisure & hospitality. Larger companies appear to be most attentive in preparing for regulations: they saw the largest decrease in the proportion of lower salaries, and this shift began in 2015, as the rule-making process was unfolding. Small businesses saw the second largest net drop in the proportion of new hires eligible for overtime pay, which is somewhat surprising since the overtime rule provides an exemption for businesses with revenue under $500,000. Small businesses may be paying up to compete in the tight labor market, since they tend to have less brand power and less sophisticated benefits packages to offset low salaries.

As with much else in the world of public policy, we are in a period of unusually high uncertainty. It remains to be seen how companies will adjust their salary plans as more indications of future policy come to light, but the combination of wage pressures and the overtime rule change has already had a significant impact.

This article is part of a series called Opinion.
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