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WebMemo #535 on Jobs and Jobs and Labor Policy

July 14, 2004

New Overtime Regulations: Modernizing Outdated Rules or Eroding Worker Protections?

By and

The Economic Policy Institute (EPI) has released a report[1] on the final overtime rules published by the U.S. Department of Labor (DoL) last April[2]. EPI has argued before that, if adopted, these overtime regulations would mean "lower pay [and] longer hours for millions of workers"[3]. These charges are simply untrue. The new regulation will, in fact, improve overtime protections for employees.

 

The current regulation is antiquated.

Before a worker may be considered exempt for overtime, there are three tests that must be met. First, the "salary-basis" test specifies that a worker must be paid on a set salary; hourly employees who work more than 40 hours in a given work week are generally eligible for overtime. Second, the "salary-level" test determines that any worker who earns less than a certain salary is automatically eligible for overtime, regardless of his or her job. Finally, a "duties test" allows certain executive, administrative, and professional employees to be exempt from overtime based on the kind of work they do.

 

The salary test has not been updated in nearly 30 years, and the duties test has gone even longer without any significant changes. One consequence of the lack of updated rules is that the minimum salary needed for a worker to be exempted from overtime is an absurdly low $155 per work week. The new regulation would raise the salary test to $455 per work week: any worker paid less than $455 per work week (or $23,660 per year) would automatically receive overtime protection, regardless of job duties.

 

The new rules mainly simplify the duties tests, but make few substantive changes.

Under the current rules, there are both short duties tests and long duties tests to determine whether or not an employee is exempt from overtime. Which test is administered depends on the employee's salary level. But because of the failure to update the regulation, the long test has become irrelevant and the "short test" applies to all workers earning more than $13,000 per year. Under the new final rules, a single "standard test" for each occupational category (administrative, executive, and professional employees) replaces all of the old tests.

 

The new rules are particularly valuable for low-level supervisors. Under the current "short test," an "assistant manager" who regularly supervises two other employees could be designated exempt from overtime. Under the new rules, supervisors must have the authority to hire and fire, or their suggestions in that arena must be given "particular weight" in addition to the other managerial duties. This is a significant tightening of the executive duties test that will result in fewer exemptions.

 

Similarly, for administrative and other office employees, employers will find it more difficult to deny overtime under the new rules. The regulation dictates that the employee, as part of his or her job duties, must exercise "discretion and independent judgment with respect to matters of significance."

 

The new duties test for professional employees will have little, if any, effect on who receives overtime. The current rules state that the primary duty of a professional is "work requiring knowledge of an advanced type" that is "customarily acquired by a prolonged course of specialized intellectual instruction and study," which is the same language used in the new rule. Both the old rule and the new rule make a narrow exception for cases where substantial experience exists, such as an attorney who did not attend law school. That type of worker may still be considered a professional.

 

The new regulation means more employees will be eligible for overtime, not fewer.

In their new study, EPI would have policymakers believe that some 6 million white-collar employees would lose overtime protection were the new overtime regulation adopted. This is based on the flawed premise that many hourly workers would be converted to a salary-basis and denied overtime. Because the overtime rules are either the same or change so minimally, employers who would be inclined to attempt this would have already done so.

 

According to a forthcoming analysis by The Heritage Foundation, nearly 1.3 million currently exempted workers who earn between $155 and $455 per week would receive overtime protection under the new regulation that they do not enjoy now. Because the new regulation makes it more difficult to exempt administrative and executive employees, more workers would be eligible for overtime protections.

 

The only workers who may lose overtime protections because of the new regulation are certain individuals earning more than $100,000 per year. Most of these workers are executives or professionals who are not eligible for overtime, anyway. Even if all of these highly paid employees lost their overtime protection-which is unlikely-only about 272,000 workers would lose overtime, according to this same Heritage study. A more reasonable estimate would be that around 100,000 highly compensated workers may lose their overtime.

 

Conclusion

The new overtime regulation is a welcome modernization from the outdated rules that employers must currently use. Contrary to the Economic Policy Institute's assertions, the new regulation would ensure that more employees enjoy overtime protections, not fewer.

 

Kirk A. Johnson, Ph.D., is Senior Policy Analyst in the Center for Data Analysis, and Paul Kersey is Bradley Visiting Fellow in Labor Policy, at The Heritage Foundation.



[1] "Longer Hours, Less Pay" Economic Policy Institute Briefing Paper, July 14, 2004.

[2] Department of Labor, Wage and Hour Division, "Defining a Delimiting the Exceptions for Executive, Administrative, Outside Sales and Computer Employees; Final Rule" Federal Register April 23, 2004, pp. 22122-22274.

[3] "Eliminating the Right to Overtime Pay" Economic Policy Institute Briefing Paper, June 26, 2003.

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