The Obama administration finalized a rule Tuesday intended to force businesses to pay more overtime, doubling the annual salary a worker must make before he can be exempted from the legal requirement to be paid time and a half after working 40 hours in a week.
The new annual salary threshold will be about $47,500 to be deemed "managerial," up from about $23,700. The White House estimates that the change would extend overtime coverage to 4.2 million additional workers. The rule will take effect Dec. 1.
The rule had been long expected and is highly controversial. Business groups have complained loudly, arguing that the economy is still too fragile to be increasing labor costs and that small companies in particular will not be able to afford the added expense.
The White House defended the change, saying that it was long-overdue adjustment to catch up to the current workplace environment. The last time the standard was updated was 2004.
"Companies will have a choice to make: Either they pay their workers overtime or they cap the work week at 40 hours. Either way, the worker wins," Vice President Joe Biden told reporters Tuesday.
Labor Secretary Tom Perez said that too few people are being paid overtime, undermining the intent of the Fair Labor Standards Act, the federal law that covers overtime. The percentage of workers earning overtime has fallen from 62 percent in 1975 to 7 percent today, he said.
The administration plans to update the threshold every three years based on wage growth, it said.
Perez added that the administration would enforce the new rule vigorously. "We intend to pivot immediately into compliance assistance," he said, adding that the aim was "100 percent compliance."
Under the Fair Labor Standards Act, employers are allowed to exempt workers whose duties are deemed managerial in nature from the requirement that they be paid overtime. Critics, especially labor unions, have long argued that the exemption is widely abused by employers.
Business groups counter that the exemption allows employers and workers to have more flexibility to set schedules since it removes the legal requirement to monitor work hours. Some employers won't be able to hold on to workers with it, they argue.
"While the Department of Labor made some important changes in the final regulation, the revised overtime regulation issued today still represents another regrettable burden being piled on employers as they attempt to grow in a tepid economy," said Randy Johnson, senior vice president for labor, immigration and employee benefits at the Chamber of Commerce.
Critics said that rather than paying out more overtime, many businesses instead would be forced to cut back on worker hours or reduce pay to manage the higher labor costs.
"The overtime rule will mean many salaried workers on a management track will be downgraded to hourly status, with restrictive schedules and worse career prospects," said Trey Kovacs, labor policy analyst for the Competitive Enterprise Institute, a free-market think tank.
The administration considered a higher annual salary cap, stating at one point last year that it would set the level at $50,440 but backtracked on that last month. Perez said his department's analysis of the economic data determined that the slightly lower level was a better fit nationally since it had to cover a variety of industries and regions.
Perez summed up the rule by stating, "Some people are going to get more money. Some people are going to get more time off. Everybody will get clarity."