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Obama’s Overtime Law Failed, But Still Helped Thousands

U.S. President Barack Obama talks before signing a Presidential Memorandum at the White House in Washington

U.S. President Barack Obama talks before signing a Presidential Memorandum on modernizing the overtime system to help insure workers are paid fairly for their work while in the East Room of the White House in Washington, March 13, 2014. REUTERS/Larry Downing

A new labor law rule - kicked back by a federal judge last month - that would have made almost four million Americans eligible for overtime pay may still have resulted in higher wages for the workers it was intended to help.

The new legislation would have significantly raised the salary cap under which employees were eligible to earn overtime. In response, some large companies, such as Walmart, gave raises to workers whose pay fell just under the new threshold, making them ineligible for overtime pay. Other companies reclassified salaried overtime-exempt workers as hourly employees, which would make them eligible to earn overtime for workweeks longer than 40 hours.

Related: Obama's Plan to Extend Overtime Pay Is Blocked by Federal Court

"There's a whole set of companies that had already communicated to their employees that they were going to change their employment status or give them raises," said Brian Kropp, HR practice leader at CEB. Because the rule was halted only about a week before it was set to take effect, many companies had already made the switch.

Raising Wages to Avoid Overtime

Yanking back promised raises is a non-starter, especially with the lowest unemployment rate in nearly a decade, compensation experts say. "They're not going to adjust employees backwards," Kropp said. "To go back would be hugely damaging from an engagement and productivity perspective."

"The choices you make around how you pay employees is so impactful to your business and is a big piece of your larger employer brand," said Lydia Frank, vice president at Compensation information and research company PayScale.

PayScale analyzed 553 job titles that paid between the old and new thresholds for overtime eligibility ($23,661 and $47,476, respectively), and found that the number making in between those two numbers dropped sharply over the past two quarters.

This indicates, the company said, that many businesses have been raising workers' wages to keep from having to pay overtime. For a typical position among those 553 analyzed, there was an 18 percentage point drop in the number earning below the new threshold. Out of the job titles it examined, PayScale found that the number of people making less than $47,476 fell in 539 of them.

According to Mark Szypko, vice president of compensation strategy at Salary.com, roughly 40 percent of their corporate clients had implemented either raises or worker reclassification in anticipation of the FLSA update.

Kropp estimated that about 5 percent of the workforce across retail, food service and hospitality and leisure — all sectors with large numbers of lower-wage workers — will be affected.

Trump Likely Won't Fight It

Those raises could have more staying power than the legislation itself. Ross Eisenbrey, vice president at the Economic Policy Institute, said it isn't clear yet whether or not the rule and the higher overtime threshold will survive after the inauguration. Donald Trump's stated opposition to corporate regulations makes him unlikely to support defending it in court, although Eisenbray said at least one organized labor group is positioning itself to continue defending it even if a Jeff Sessions-led Department of Justice declines to do so.

This ambiguity around the legislation's fate could prompt companies to take a better-safe-than-sorry approach, Eisenbray said, since it would be hugely expensive to have to pay months of overtime retroactively.

"The biggest takeaway for us is really it's interesting to see that a lot of companies took action before the law said they had to," Frank said. "There's no plans to repeal or roll back changes. I do think we'll see those wages stick," she said.

"At the end of the day, employees will benefit," Kropp said. The low unemployment rate also makes it likely that even businesses who didn't give raises in anticipation of the higher threshold could be forced by market competition to match their rivals' pay increases.

"If someone can get a $5,000 or $7,000 raise by going down the street, why wouldn't they?" Eisenbray said.

"For companies that aren't paying as much as their competitors, they're going to see their best talent move," Kropp predicted. "In this segment of the market, people will move for 50 cents or a dollar an hour difference."