Why new overtime regulations mean you'll get paid more

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Why new overtime regulations mean you'll get paid more

If you’re the average American, you feel like you’re working too hard and not getting paid enough.

But that’s what overtime is for, right? You work longer so you get paid a little extra for your time. Seems fair.

Except for the fact that who qualifies for overtime is severely limited.

Whether or not salaried workers get paid overtime depends on if they’re categorized as exempt or nonexempt, and many people are paid too much to qualify for overtime pay. They’re essentially working extra hours for free.

But new Department of Labor overtime regulations are shaking up who qualifies for overtime pay, and it could mean a pay increase for a lot of Americans.

Why are overtime regulations changing?

Once upon a time (1938, to be exact) the Fair Labor Standards Act (FLSA) gave us a lot of great things: a 40-hour work week, a minimum wage, time-and-a-half overtime, and the elimination of child workers.

Some of those regulations have stayed the same – child labor is still mostly frowned upon – while others, like the minimum wage, are in constant flux, updating for modern times.

In 1975, a "white collar exemption" was introduced in respect to who qualifies for overtime pay, and set a salary limit at $23,660 – that is, if you make less than that, you automatically qualify for overtime.

That was great in 1975, when it covered 61% of salaried workers. In 2015, though, the poverty line for a family of 4 was $24,008. Clearly, money doesn’t go as far as it used to.

And that’s where the new regulations come in. Overtime pay was in need of an overhaul, and in March 2014 President Obama tasked the Department of Labor to do just that.

What are the new overtime regulations?

The new regulations introduce a huge change: the salary limit is being bumped up to $50,440. That means a lot of businesses will have to starting handing out overtime pay or increasing employee salaries.

The main reason for such a huge bump is the fact that the exemption limit hasn’t been increased in 40 years, so it didn’t keep pace with things like inflation and pay increases. That’s why another aspect of the new rules is instituting a practice of connecting the exemption limit to the poverty line, so we don’t find ourselves in a similar situation in another 40 years. Incremental increases in the exemption limit means businesses won’t have to scramble to institute such a huge change to their payroll.

Who it will affect

In a world where pay equality is a major point of contention, the new overtime regulations go a long way in helping women and minority workers.

The annual salary for white Americans was $55,257 in 2013, compared to $34,598 for African-Americans and $40,963 for Hispanics. Along those same lines, female managers averaged $981 per week. Male managers averaged $1,346. A lot of workers fell into a range where they were making too much to qualify for exempt status but were struggling to make a living wage, and now they’ll likely either see salary increases or additional income by way of overtime pay.

While women and minorities stand to earn fairer compensation, white men will also benefit from the regulation changes, maybe even more than other groups. Men work an average of 11.7 hours of overtime, compared to 10.7 hours for women, so they’ll probably end up making even more overtime money thanks to that extra hour.

Overall, it’s estimated that between 5 and 6 million more people will be affected by the new regulations by being recategorized as nonexempt. That’s a big chunk of people who will have a little extra spending money – and will have to recognize the consequences of that.

What it means for businesses and employees

There are two ways to come at the impact of the new overtime regulations: from the business perspective, and from the side of employees.

Businesses will have to decide how much they’re going to change the way they do things. They might decide to raise employee salaries to once again make them nonexempt. Of course, that means raising salaries to above $50,440, which, depending on the size of the company and how much employees are already getting paid, could be a huge deal. Employees will once again lose out on overtime pay but the increase in their base salary hopefully makes up for that.

Employers can also choose to just go along with the new overtime pay. They might not increase salaries, but they’ll begin paying out overtime appropriately. There’s not only a financial cost of actually paying more money, but also the cost of implementing new processes to accurately track overtime hours (and employees will have to be more diligent about logging their extra work).

And then there’s the dark side: employers could choose to lay off employees, limit hours so employees aren’t allowed to work overtime, or hire extra ones to take hours away from current employees. There’s always a risk of downsizing when it comes to companies needing to spend extra money.

As for employees, you shouldn’t turn down overtime pay if you’re putting in the hours, but be careful about how that affect your taxes. You’re taxed based on what tax bracket you’re in, which is determined by how much money you make. If your overtime pay pushes you to the next tax bracket, you’ll end up paying more on Tax Day than you might have planned.

But there are smart ways you can use that money! If you are going to move into a higher tax bracket, putting a little extra toward a retirement plan like an IRA or a 401(k), an education plan like a 529, donating money to charity, or an HSA or FSA health account. That way you’ll get some tax deductions (either now or in the future) to help counter the higher tax bill.

And, of course, you always have the option of paying down debt, saving the money, or buying a needed insurance policy. You can get a quote to see just how cheap monthly premiums can be.

The new overtime regulations will be released in full in July 2016, so we’ll see all of the details later on in the summer. Until then, companies will be working to figure out how they’re going to deal with it – and workers should be figuring out how they’ll make the most with their extra money.