New Rules Make More Workers Eligible for Overtime


The U.S. Department of Labor recently issued new overtime rules that will become effective December 1, 2016. The new rules raise the salary level for workers to be eligible to receive overtime pay by more than double. The current threshold is $23,660; on December 1, it goes up to $47,476. This means employers will now be required to pay overtime to workers receiving a salary of nearly $50,000 per year.

On the surface, these new rules appear to be a positive development for workers. But as is the case with many rules and regulations that come from the government, there are likely to be unintended consequences as well. While millions more workers will now be eligible for overtime pay, there are a number of ways employers may try to compensate for this change. These include:

A Small Raise for Some Workers: For employees who are already being paid near the top end of the income threshold for overtime pay ($47,476), one easy fix could be to give them a small raise. For example, an employee earning $46,500 could see their salary bumped up to $48,000 so the employer will not have to pay overtime.

Less Flexibility for Effected Employees: In today’s economy, there are numerous workers who value the flexibility of being able to come in late, leave work early and work from home a couple days a week – as long as their work gets done. In many companies, this arrangement works well for both sides as the employers are able to pay a set salary in exchange for giving employees freedom and flexibility.

This could all change for employees who have become accustomed to this arrangement. Employers may now begin to track hours worked more closely to ensure they are following the overtime rules, and employees may be forced to come into the office during set hours to complete their work.

Lower Base Salaries to Compensate for Overtime Pay: Perhaps the worst potential consequence for employees could be a reduction in the base salary to make up for having to pay overtime. Employers are only bound to pay minimum wage. As such, many will have the freedom to lower the employee salary to even out their expenses. This may seem like a break-even proposition for employees, and in the long run it probably is. But because of the tax implications (more on this in a moment) employees could lose significantly in the short term under this arrangement.

Overtime Pay and Taxes

There is a perception that overtime pay is always taxed at a higher rate than regular pay. This is not necessarily the case. However, what is nearly always the case is that a higher percentage of taxes are withheld from your paycheck when you are paid overtime. This is because tax withholding is calculated based on your projected tax bracket (assuming you worked the same amount of hours throughout the year). This is why a lower base salary with overtime could hurt employees by reducing their immediate take home pay. But in the long run, your tax rate is based ultimately on the tax bracket you fall in. So in other words, if you have more withheld now, you will get that money back at the end of the year if you end up in the same tax bracket. For more information on overtime and taxes, tax brackets and the potential impact of the new overtime rules, speak with your local tax professional.


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