Earlier this summer, the Biden administration’s Department of Labor (DOL) announced a dramatic expansion of overtime pay regulations that could have a major impact on small businesses. Existing regulations require businesses to pay all employees making less than $35,568 per year 1.5 times their pay for hours worked over 40 hours per week.
The sweeping changes proposed by DOL would force many businesses to pay employees for overtime by increasing the salary threshold from $35,568 to $55,068 per year – a 55 percent increase. Additionally, the proposal would expand the existing threshold for what is considered a highly compensated employee from $107,432 to $143,988.
The proposed rulemaking would also reintroduce overtime pay to U.S. territories and establish scheduled changes to the rules every three years. Collectively, these changes would expand the pool of required recipients by 3.6 million employees.
At a time of soaring labor costs, this proposal would further harm employers by substantially increasing workforce costs. Inflation and high interest rates are already straining the U.S. economy, and requirements to increase pay for over three million Americans would likely lead to extensive layoffs, especially for small businesses. This could also increase prices for many consumer goods, as manufacturing, food service, and retail would be particularly impacted by this rule.
The scheduled adjustments to the rules are intended to keep the threshold for overtime pay closer to increases in wages over time but the phrasing of the change could also result in lower thresholds if the weekly earning percentiles were to decrease.
Though the Biden administration and many of their allies frequently tout stagnating wages and lack of “fair pay” as talking points, both the Obama and Trump administrations increased the overtime pay threshold. During the Obama administration, the initial threshold increase proposal was blocked by a federal judge who ruled that “the final rule was inconsistent with congressional intent”.
Among the other substantive alterations to overtime rules, DOL also claimed they plan to establish a system for better identifying who is exempt from overtime and who is not. At this time, the manner with which this will be determined has been left ambiguous. This obscurity was one of the driving factors for rulings against the Obama-era changes, due to the ambiguity of built-in exemptions for “executive, administrative or professional employees.”
Between the ambiguity of this enforcement and the broad overreach the executive branch is attempting to exercise, it is unlikely that these changes would hold up in court. Several national business groups have already expressed their opposition to the changes and the likely legal challenges that they would bring against the new regulations. Instead of losing in court, DOL should abandon this proposal and look for ways to help workers and small businesses alike.