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New Rules For Overtime Pay: Blessing Or Curse For Business?

Increasing the salary threshold for overtime benefits will help workers, but will it undercut businesses’ bottom lines?

New Rules For Overtime Pay: Blessing Or Curse For Business?
[Photo: Flickr user Christian Schnettelker]

If you earn more than $23,660 as a full-time salaried worker, it doesn’t matter how many hours you put in above and beyond the standard 40 per week: You cannot collect the “time and a half” overtime pay, a crucial benefit for low-income workers struggling to make ends meet, or those just starting their careers with a mountain of college debt.

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That’s about to change. President Obama announced this morning that the Department of Labor (DOL) will propose to raise the salary threshold below which workers must receive overtime pay when they work more than 40 hours in a week to $50,440 in 2016. The new rule is essentially an executive order that doesn’t require approval from Congress. It will affect an estimated 5 million workers, many of whom are female college graduates between the ages of 35 and 54.

When former Economic Policy Institute economist Heidi Shierholz analyzed the change in the share of salaried workers who were covered by the overtime salary threshold between 1975 and 2013, she found that those covered by the threshold declined from 65% 40 years ago to just 11% in 2013. Only one increase was made during that time, and its value was eroded due to inflation.

The proposal is designed to help workers, but will that come at the cost of companies’ bottom lines? According to some experts, the answer is no–and the history of improving employee benefits, including raising the minimum wage, suggests that expanding overtime pay could actually help businesses thrive.

In a blog post, the president wrote that this latest initiative would be good for business–with a caveat. “It’s good for business owners who are already paying their employees what they deserve–since those who are doing right by their employees are undercut by competitors who aren’t.”

The Objections

Establishing a fair minimum wage and offering low-wage workers benefits are two issues that have been hotly debated. For instance, the motion to raise Seattle’s minimum wage drew out dissenters who said that it would result in restaurant closures, even though that claim was proven untrue.

Members of the National Retail Federation (NRF) are among the most vocal critics of this change to overtime pay. A study the NRF conducted with retail and restaurant managers indicates an overall disapproval for the proposed regulations. Seventy-five percent said the change would diminish the effectiveness of training and hinder their ability to lead by example.

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“They may bring back complicated and burdensome duties tests that would attempt to categorize and segregate management responsibilities from other tasks in a retail or restaurant establishments,” the NRF found. “They all point to more paperwork for managers and fewer opportunities for advancement.”

How Companies Get More By Giving More

While one business owner boosted his workers’ salaries to a $70,000 minimum–the amount that’s been scientifically shown to increase overall satisfaction–simply increasing the pay level and benefits for low-wage workers has also been proven to be good for the bottom line.

A “good jobs” strategy results in a virtuous cycle of employee retention, higher customer satisfaction, and other long-term factors that increases profits while making up for the higher wage and benefits, according to MIT professor Zeynep Ton.

Costco starts workers at $11.50 per hour, but the average pay is around $21. That amounts to $840 per week before taxes, or over $42,000 per year for full-time employees–a good bit higher than the current threshold to be eligible for overtime pay. The warehouse merchandiser also offers health benefits to 90% of its staff.

IKEA is following suit in the U.S.: starting in January 2016, its average minimum hourly will be $11.87, but that will vary by city, taking into account transportation, housing, and medical costs in each location. That works out to be around close to $25,000 per year for full-time workers, which is still higher than the current accepted threshold for overtime.

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Starbucks offers some baristas up to $25,000 per year (exceeding the overtime threshold again), but those working more than 20 hours per week can get 401(k) matching, along with discounted stock purchases, adoption assistance, health coverage, and the opportunity to pursue a college degree with tuition reimbursement. (In the interest of full disclosure: One of my family members works as a barista at Starbucks.)

Employee-friendly policies have coincided with steadily rising revenues at these companies. At IKEA, revenue has increased from 10.4 billion Euro in 2001 to 29.3 billion in 2014. Ditto for Costco, which went from $99.1 billion in 2012 to $121 billion in the first quarter of 2015, and Starbucks, whose revenue rose from $13.3 billion to $18.2 billion in the same period.

Other businesses in price-sensitive industries that have had success with similar employee-friendly practices include Southwest Airlines, Trader Joe’s, Zappos, In-N-Out Burger, Quiktrip, and The Container Store.

Bottom Line?

It’s tough to predict how the new rule will affect businesses over time. What is more clear is that raising the salary threshold for overtime will protect workers, much the way the original Fair Labor Standards Act (FLSA) of 1938 did by raising the national minimum wage and time-and-a-half pay for hourly and certain salaried workers after 40 hours of weekly work.

As Jared Bernstein, former chief economist for Joe Biden, notes in the Washington Post: “The FLSA was born of the acute realization that one role of government was to stand up for those who, absent rules like overtime, risked exploitation, overwork, and inability to claim their fair share of the productivity growth they themselves were helping to generate.”

About the author

Lydia Dishman is a reporter writing about the intersection of tech, leadership, and innovation. She is a regular contributor to Fast Company and has written for CBS Moneywatch, Fortune, The Guardian, Popular Science, and the New York Times, among others.

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