GLOBAL ECONOMY

Rule change to give 4M more workers overtime – and small business owners worry

U.S. President Barack Obama jokes with guests before signing a presidential memorandum for modernizing overtime protections for workers during an event in the East Room of the White House, on March 13, 2014 in Washington, DC. The memorandum will direct the Secretary of Labor to begin the process of addressing overtime pay protections to make sure millions of workers are paid a fairly. (Photo by Mark Wilson/Getty Images)

U.S. President Barack Obama jokes with guests before signing a presidential memorandum for modernizing overtime protections for workers during an event in the East Room of the White House, on March 13, 2014 in Washington, DC. The memorandum will direct the Secretary of Labor to begin the process of addressing overtime pay protections to make sure millions of workers are paid a fairly. (Photo by Mark Wilson/Getty Images)

More than 4 million U.S. workers will become newly eligible for overtime pay under rules issued Wednesday by the Obama administration.

The White House estimates that the rule change will raise pay by $1.2 billion a year over the next decade, but business groups say it will hurt workers by forcing many small businesses to convert salaried positions to hourly ones.

The policy changes are intended to counter erosion in overtime protections, which date to the 1930s and require employers to pay 1½ times a worker's regular salary for any work beyond 40 hours a week.

In the fast food and retail industries in particular, many employees are "managers" who work 45, 50 hours or more, but are paid only a little bit more than the people they supervise. The rule change will  affect businesses like restaurants, retailers, landscapers and moving companies.

Under the new rules, first released in draft form last summer, the annual salary threshold at which companies can avoid having to pay overtime rates will be doubled from $23,660 to nearly $47,500. That would make 4.2 million more salaried workers eligible. For the most part, hourly workers will continue to be guaranteed overtime.

More On This...

The White House claims the rule change is a win-win for workers that will cause employers to react in one of three ways (see video below): either they will choose to pay overtime rates, give managers a raise so that they make $47,500 or more to avoid paying overtime or reduce the number of hours an employee works.

Whatever the employer decides, "the worker wins," said Vice President Joe Biden on a conference call with reporters Tuesday afternoon.

Based on data released by the Department of Labor, the lion's share of the affected workers, 31 percent of them, are 25 to 34 years old. Nearly 45 percent have a undergraduate or graduate college degree. A third of the workers live in California, Florida, New York and Texas.

New rules will hurt employees, small businesses claim

Business groups, however, say the changes will increase paperwork and scheduling burdens for small companies and force many businesses to convert salaried workers to hourly ones in order to better track working time. Many employees will experience this as a step down, they said.

"With the stroke of a pen, the Labor Department is demoting millions of workers," David French, a senior vice president for the National Retail Federation, told the Associated Press. "Most of the people impacted by this change will not see any additional pay."

The overtime threshold was last updated in 2004 and now covers just 7 percent of full-time, salaried workers, administration officials said. That's down from 62 percent in 1975.

The higher threshold, which will take effect Dec. 1, will lift that ratio back to 35 percent, according to Labor Secretary Tom Perez. Perez has spearheaded the administration's effort to alter the rule for the past two years.

The new rule is intended to boost earnings for middle- and low-income workers, Perez said, which have been stagnant since the late 1990s. Overtime pay hasn't gotten as much attention as nationwide efforts to increase the minimum wage, but it could have a significant impact.

"This, in essence, is a minimum wage increase for the middle-class," Judy Conti, federal advocacy coordinator for the National Employment Law Project, an advocacy group, said.

Overtime has become a sore point for many managers, assistant managers and management trainees in the fast food and retail industries.

Despite their titles, many such workers have filed lawsuits against chains such as Chipotle and Dollar General claiming that they spend the vast majority of 50- or 60-hour weeks working cash registers, mopping floors or performing other tasks typical of regular employees. Yet they don't get paid time and a half when they clock more than 40 hours in a week.

Still, Tammy McCutchen, a former Labor Department official during the George W. Bush administration who is a lawyer representing a number of employers, said the rule could leave many workers with less flexible schedules. That's because employees who eligible for overtime are only paid for the hours they work.

As a result, an hourly worker "who takes an afternoon off to attend a parent-teacher conference will not be paid for that time, but an employee (who is exempt from overtime) will be paid her full guaranteed salary," she said in congressional testimony last week.

Perez said the administration took several steps in the final rule to address business concerns: The threshold was lowered from the original proposal of $50,440; bonus payments can count toward the threshold; and the rule will have a long phase-in before taking effect on Dec. 1.

Mara Fortin, president and CEO of seven Nothing Bundt Cakes bakeries in San Diego, said she might give raises to her "superstar" managers to lift their pay above the overtime threshold. But to offset the cost she would have to cut back on the end-of-year bonuses she frequently gives.

Fortin has 14 salaried managers and assistant managers among her 110-person staff. The new rule will create problems for managers, some of them newer, who take longer to get their work done, she said. She might have to cut their base pay so they make the same amount as they do now, including overtime.

"We can't pay you time and a half because you're slow," she said. "This is extremely frustrating for me."

Based on reporting by the Associated Press.