Overtime Bill: Law Or Not?

On July 1, 2024, a new overtime bill came into effect in the United States, impacting salaried employees and their eligibility for overtime pay. The bill, finalised by the Biden-Harris administration, increases the minimum salary threshold for overtime exemption from $35,568 to $43,888 per year, with a further increase to $58,656 planned for January 1, 2025. This change will affect millions of workers and is the first update to the salary threshold since 2019.

The Fair Labor Standards Act (FLSA)

Under the FLSA, employees who work more than 40 hours in a workweek are entitled to receive overtime pay at a rate of one-and-a-half times their regular pay rate. The FLSA also establishes a minimum wage, which was last increased in 2009 to $7.25 per hour. Additionally, the Act includes provisions to protect children from exploitation in the workforce by setting minimum ages for employment and limiting the number of hours that minors can work, especially during school hours.

The FLSA has been amended several times since its passage to expand its coverage and adjust the minimum wage to reflect inflation. For example, the 1961 Amendment expanded coverage to include jobs in schools, hospitals, nursing homes, and all government entities. The FLSA also now prohibits wage discrimination based on gender and age, thanks to amendments made by the Equal Pay Act of 1963 and the Age Discrimination in Employment Act of 1967.

The FLSA is enforced by the Wage and Hour Division of the U.S. Department of Labor, which carries out the administration and investigation of the Act. The Act is of utmost importance for protecting workers' rights and establishing labor standards in the modern workplace.

The Biden-Harris administration's rule change

The new rule updates the salary threshold to $43,888 from July 1, 2024, and to $58,656 from January 1, 2025. This adjustment is based on the methodology used by the previous administration in the 2019 overtime rule update. Additionally, the rule will adjust the threshold for highly compensated employees, with salary thresholds updating every three years, using current wage data to determine new salary levels.

The Biden-Harris administration's change is a follow-through on their promise to raise the bar for workers who contribute significantly to the country's economic prosperity. The Department of Labor, led by Acting Secretary Julie Su, engaged extensively with employers, workers, unions, and other stakeholders before issuing the proposed rule in September 2023. They considered over 33,000 comments in developing the final rule, ensuring clear and predictable guidance for employers on compensating employees for overtime hours.

The new rule expands overtime protections to lower-paid salaried workers, ensuring they receive time-and-a-half pay when working more than 40 hours a week or gain valuable time with their families. It also provides for regular updates to the salary thresholds, protecting against the erosion of overtime protections over time. This change is a welcome development for workers, who have shared their appreciation for being fairly compensated for their time and efforts.

However, the rule change has also faced opposition and legal challenges. Business groups and the state of Texas filed lawsuits arguing that the rule violates the Fair Labor Standards Act and disregards legal precedent. The U.S. District Court for the Eastern District of Texas vacated the Department of Labor's 2024 final rule, and lawsuits are currently pending in two other federal district courts.

The impact on businesses

The impact of the overtime bill on businesses is complex and multifaceted. On the one hand, the bill extends overtime protections to lower-paid salaried workers, ensuring they receive fair compensation for working more than 40 hours per week. This can lead to improved employee morale, increased productivity, and a more satisfied workforce. On the other hand, businesses, especially small businesses, may face challenges in complying with the new regulations.

One of the primary impacts of the overtime bill on businesses is the financial burden it imposes. Businesses may need to allocate additional funds to cover the increased salary and overtime expenses for their employees. This can be particularly challenging for small businesses that may struggle to find the necessary funds without increasing prices or cutting jobs. The bill's two-part approach to increasing the salary threshold, with one raise on July 1 and another on January 1, 2025, provides some flexibility for businesses to adjust, but it also adds complexity to their budgeting and payroll processes.

Additionally, the overtime bill may result in an increase in administrative tasks for businesses, especially those with more non-exempt employees. Record-keeping responsibilities may become more cumbersome, requiring businesses to invest in new technology or improve their existing systems to effectively manage employee time-keeping and payroll calculations. Proper training and communication with employees regarding time-keeping, overtime approval, and company policies will also be essential to ensure compliance with the new regulations.

The bill's impact on employee classification is another important consideration for businesses. They may need to review and adjust the classification of their employees, determining whether to adjust salaries or reclassify employees as non-exempt. This process can be complex, as it involves meeting multiple requirements related to salary basis, job duties, and exemption criteria. Businesses will also need to consider the potential consequences of reclassification, such as increased overtime expenses, changes in employee morale, and possible perceptions of demotion among affected employees.

Furthermore, the overtime bill may lead to unintended consequences for businesses. For example, reclassifying employees as non-exempt may result in a loss of workplace flexibility and the need to closely monitor employee work hours, particularly for those using company equipment or working remotely. Businesses will need to revisit and update their policies on the use of company resources and working hours to ensure compliance with the new regulations.

While the overtime bill aims to protect workers from exploitation and ensure fair compensation, it also creates a dynamic landscape for businesses to navigate. Businesses will need to stay informed about any changes to federal and state regulations and seek legal counsel or HR expertise to ensure they are meeting their obligations and effectively managing their workforce.

The history of overtime rules

The Pre-overtime Period

In the 1600s and 1700s, agricultural workers in the UK typically laboured from sunrise to sunset, seven days a week, with plenty of breaks throughout the day, resulting in an average workday of around eight hours. In the 1800s, American workers often worked approximately seventy hours per week, and the length of the workweek became a significant political issue.

The Industrial Revolution

The Industrial Revolution, which reached the US in the early 1800s, transformed society and working hours. Large factories needed to operate around the clock, and employees, including children, were expected to work ten to sixteen hours a day, six days a week.

The Beginnings of the Eight-Hour Workweek

Following international trends and a growing labour movement, Illinois became the first US state to enact an eight-hour workday mandate in 1867. However, many employers refused to comply, leading to a massive strike in Chicago. In 1869, President Ulysses S. Grant issued a proclamation guaranteeing an eight-hour workday and stable wages for government workers.

Private Sector Inclusion

In 1906, two large printing firms were the first US companies to adopt an eight-hour workday. The Adamson Act of 1916 established an eight-hour workday for interstate railroad workers, and in 1926, the Ford Motor Company implemented a five-day, forty-hour workweek after previously adopting an eight-hour day.

Passage of the Fair Labour Standards Act and the Advent of Overtime

In 1938, Congress passed the Fair Labour Standards Act (FLSA), initially limiting the workweek to 44 hours and then amending it to 40 hours two years later. This act also introduced the concept of overtime pay, guaranteeing all non-exempt workers time-and-a-half pay for hours worked beyond 40 per week.

Recent Developments

Overtime rules have continued to evolve, with federal overtime rules being overhauled as recently as 2020, increasing the salary threshold for exempt employees. In 2022, new overtime rules came into effect, aiming to address the issue of Americans working longer hours than ever before. The US Department of Labor's new rules are expected to make an additional 4.2 million people eligible for time-and-a-half pay.

The future of overtime rules

The Department of Labor's recent rule, which would have increased the threshold for salaried employees eligible for overtime pay, was struck down by a Texas judge who claimed the agency overreached its authority. This ruling may hinder the Biden administration's efforts to update overtime rules, and it remains to be seen whether their proposed changes will come to fruition.

However, increasing the salary threshold remains a priority for the administration's Department of Labor. Additional proposals on the horizon include the possibility of automatic annual or periodic increases to the salary threshold by linking it to an economic indicator, as well as formalizing a "duties test" to scrutinize the day-to-day work of administrative employees who exceed the salary threshold.

The interplay between federal and state-level regulations also adds complexity, with most states having their own overtime rules that meet or surpass federal standards. This patchwork of regulations can be challenging for employers, especially those operating in multiple states, and it underscores the importance of staying up-to-date with compliance practices.

As the landscape of overtime rules continues to evolve, employers must remain vigilant to ensure compliance with applicable regulations. This includes implementing best practices such as drafting timekeeping policies, maintaining transparent time and pay records, and clearly communicating company policies to employees.

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