Biden's new overtime rule could help millions of 'stuck' salaried workers. But there are hurdles ahead.

By Hannah Erin Lang

'This is so huge,' one worker tells MarketWatch. 'I can breathe a little.'

S. really loves her job.

As a full-time employee working in the administrative office at a university in North Carolina, she helps students register for classes, navigate graduation requirements and plan their studies. During busy seasons, like the start of the school year, S. can work 10-hour days putting on events or answering students' calls and messages at any time of the day or night.

She rarely takes time off - only when she's sick or when the school closes for Christmas. Still, she said, her $43,000 salary doesn't stretch far enough to build savings or even comfortably pay the bills.

"Your pay does not increase, but you start wearing more hats," said S., who asked to be identified only by her first initial to avoid retaliation from her employer. "Sometimes it can be very stressful. I would love to get compensated for it, and I feel that many people are in the same situation."

S. could soon see some additional compensation from those long hours. She's one of more than four million workers who could benefit from the Biden administration's new rule expanding eligibility for overtime pay.

The rule, finalized Wednesday by the Labor Department, raises the salary level at which workers could still qualify for overtime, significantly increasing the number of employees eligible for time-and-a-half pay when they work more than 40 hours in a week.

The new rule, though relatively targeted in scope, could provide a much-needed economic boost to a group of lower-paid workers who have faced significant strain in the last few years, squeezed on both ends by higher costs of living and slower-growing salaries.

But, like the Biden administration's recent move to eliminate noncompete agreements, the overtime rule faces potential hurdles ahead - including legal challenges, which have derailed previous attempts to broaden eligibility.

"There's still millions of people out there who should have some kind of overtime pay protections who don't, and this will hopefully go a long way toward making up some of that gap," said Samantha Sanders, director of government affairs and advocacy at the left-leaning Economic Policy Institute. "But I'm sure [officials] are assuming there will be a fight over it."

Who is currently eligible for overtime pay?

The Labor Department's new rule is an extension of the Fair Labor Standards Act, the foundational American labor law that sets a minimum wage and determines eligibility for overtime pay, defined as time-and-a-half pay for the hours worked beyond 40 hours a week.

When it comes to overtime, workers fall into two camps: exempt and non-exempt. Generally, hourly workers are non-exempt and therefore eligible for overtime pay. Executives, managers, administrators and "professionals" - think lawyers, doctors, teachers and creative professionals like actors and musicians - tend to fall into the exempt category.

"The idea is that a white-collar job involves more responsibility and more pay," said Melissa Lardo Stewart, a partner at the employment-law firm Outten & Golden.

Many workers falsely assume that all salaried employees are exempt from overtime pay, but that isn't always the case, she said. Eligibility for overtime pay is determined by both your pay level and the duties of your job - and can get pretty tricky to determine from employee to employee.

"It's a very large segment of the labor force that may find themselves in this gray area," said Edgar Ndjatou, the executive director of the employee-rights nonprofit Workplace Fairness.

Workers making under a certain salary level are automatically eligible for overtime pay. The current law says that employees paid less than $684 a week, or $35,568 a year, are eligible for overtime pay - though in some states, like New York and California, that threshold is higher.

"Really, what the salary threshold is supposed to do is be a proxy. Obviously, it's difficult to go into every workplace and say: 'What exactly are the job duties that this person is doing? Do we really think that they have the leverage to push back if they're working too long or aren't really being compensated enough?'" Sanders said. "[It's] supposed to say: 'We're pretty sure that if someone is making under this, they probably don't have that leverage.'"

The new rule would lift that threshold to $43,888 on July 1 and to $58,656 on Jan. 1, 2025 - meaning workers earning less than those amounts will automatically be eligible for overtime pay.

The change also includes a few other components, like a methodology for updating the salary thresholds every three years according to recent wage data.

Which workers will be most affected by the overtime rule?

The new rule will primarily benefit lower-paid white-collar workers, though managerial roles in other industries like restaurants or retail could also be affected, Sanders noted.

That group has been left out of some of the large pay gains other workers saw in the last few years. Though many employees saw their wages rise, those gains have been most substantial on the lowest ends of the earning spectrum, where many workers are paid hourly.

That has left those lower-paid white-collar workers somewhere in the middle, without the leverage of higher-paid employees or the protections given to the economy's lowest earners.

Workers have long seen these jobs as a path to stability, only to end up working long hours with slim prospects for a salary increase and a feeling of being "taken advantage of," Sanders said. "This goes a long way toward making that up for this particular kind of lower-middle-wage population."

The salary limits set by the new rule still fall well short of the median income for a four-person family - and won't go far toward affording a comfortable middle-class lifestyle these days.

Read more: A $100,000 salary no longer buys you a middle-class lifestyle. Here's why it costs so much more now.

"It's very important to these workers that have kind of been stuck," Sanders said.

When will the new overtime rule go into effect?

The new rule likely faces a bumpy road ahead.

Similar to the Federal Trade Commission's recent move to eliminate the agreements that bar workers from leaving their employer to join a rival company, the finalized overtime rule was met with swift opposition from business groups.

Read more: The FTC is banning noncompete agreements. Did your job search just get easier?

The National Federation of Independent Businesses said the rule will hurt small businesses and force owners to spend "valuable time" ensuring they comply with the new law. "This rule is another costly hoop for small-business owners to jump through," Beth Milito, the executive director of the NFIB's Small Business Legal Center, said in a statement.

The U.S. Chamber of Commerce, which has already challenged the FTC's noncompete ban in federal court, had a similar argument.

The new salary threshold that takes effect in 2025 "will impose severe burdens on small businesses and other employers and will cause many employees to lose their professional status and salary based flexibility," Marc Freedman, vice president of workplace policy at the Chamber of Commerce, said in a statement to MarketWatch.

The Economic Policy Institute estimates that the rule change will result in an extra $1.5 billion paid to workers annually. But that's still less than 0.1% of the total wages and salaries paid in the United States in a year, Sanders said.

The Chamber of Commerce did not say whether it planned to take legal action against the new overtime rule. But similar challenges have derailed previous attempts to tweak overtime-eligibility requirements: In 2016, a federal judge blocked an Obama administration rule raising the salary threshold just a week before it was scheduled to take effect.

Whether or not the Labor Department could continue enforcing Wednesday's rule change in spite of legal battles will depend on the courts, Stewart said.

And even if the new rule clears those hurdles, there are other things that could stand in the way of workers actually receiving higher pay. Many workers already don't report their overtime hours or receive the time-and-a-half pay they might be eligible for - because they don't know their rights, their employer doesn't communicate overtime rules to them or they face pressure to not report their overtime hours.

"It's unfortunately very common," Stewart said.

But for S., the legal protection to secure even a small boost in pay could make a big difference.

Her daughter lives several states away, she said, and S. can't always afford to make the trip. With an increase in her pay for those extra hours on the job, saving for that expense will be first on her list.

"No matter how much I worked, no matter how hard I worked, I just didn't see any hope and it was just getting worse," she said. "So this is so huge. It's like, OK, I can breathe a little."

-Hannah Erin Lang

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04-27-24 0927ET

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