With Obama-era Plan Scrapped, States Act to Expand Overtime Pay

Tens of thousands of salaried workers in Michigan could become newly eligible for overtime pay under a plan pushed by Gov. Gretchen Whitmer.

The governor’s proposal, still in its early stages, is the latest of its kind to be backed by Democrats at the state level. It seeks to go further than an updated federal overtime rule covering salaried employees that the Trump administration finalized in September. 

That federal regulation, issued by the U.S. Department of Labor, is significantly narrower than an Obama-era plan to expand overtime pay to more workers that was derailed by litigation.

Business groups have opposed dramatically expanding overtime eligibility and in Michigan they swiftly denounced Whitmer’s proposal when it was announced last week.

The new federal overtime rule raises the threshold under which salaried workers are granted time-and-a-half overtime pay after working more than 40 hours in a week. Starting in January, workers making as much as $35,568 annually are entitled to overtime.

Previously, the extra pay was only required for people making up to $23,660. 

The Department of Labor rule and similar state guidelines are targeted toward salaried workers, as hourly employees are automatically eligible for overtime pay under federal labor laws. 

Federal rules proposed when President Obama was in office would have increased the overtime eligibility threshold to $47,476 and included provisions to raise it based on wage growth in future years. 

A sticking point for critics is that the Trump administration’s regulations lack this sort of automatic indexing mechanism. They note that without adjusting the rule to account for growth in salaries or inflation, its benefits for workers become weaker as time passes. 

That's what happened under the federal rule that's been in place, research has shown. In 1975, over 60% of full-time salaried workers in the U.S. earned below the overtime pay threshold. By 2016, the share of workers covered had dropped to less than 7%, according to estimates from the Economic Policy Institute.

EPI's Heidi Shierholz earlier this year estimated that roughly 8.2 million workers who would have been eligible for pay enhancements from the Obama-backed rule will lose out under the Trump administration’s policy, contributing to the erosion of about $1.4 billion in potential annual wage gains. 

But much like states can set a minimum wage higher than the federal pay floor for hourly workers, they can also enact more aggressive overtime regulations.

“States have stepped up,” said Sam Berger, vice president of democracy and government reform at the left-leaning Center for American Progress, who worked as a White House policy adviser and at the Office of Management and Budget during the Obama years.

Berger said that fast food managers are a classic example, but only one position among many types of workers who are salaried but find themselves ineligible for overtime pay.

“It’s a no-brainer, particularly for progressives, this is a policy that is laser focused on the middle class. And it has a very simple premise, that people who work should get paid for it,” he added.

Others see the situation differently. Michigan Chamber of Commerce president and CEO Rich Studley in a radio interview last week described Whitmer’s plan as “reckless.”

“There is simply no good reason why the state of Michigan should supersize a very significant increase in the federal standard,” he told talk radio host Frank Beckmann, on WJR 760AM Detroit. “This is a horrible example of regulatory overreach.”

California and New York have already gone well beyond the new federal standard, adopting thresholds that will be in the ballpark of $62,000 and $58,000 respectively in the next few years.

A final rule Pennsylvania regulators proceeded with earlier this month will raise the threshold there to $45,500 by 2022, while a pending proposal in Washington state would up the pay level that qualifies a salaried person for overtime to nearly $80,000 by 2026. 

Similar proposals have been floated in Massachusetts and Maine.

Whitmer’s office has signaled that it’s looking at two salary levels as possible overtime thresholds in Michigan. One is $51,000, roughly in line with where the Obama administration’s proposed rules would’ve set the federal standard currently had they been adopted.

The other tentative possibility is $61,000, an earnings level that a recent United Way report identified as a minimum pay level that a family of four needs to cover basic costs.

In an emailed statement, the governor’s office also voiced support for indexing the overtime threshold so it rises in future years. Though it emphasized that the method for doing so would be determined during the forthcoming rule-making process.

That process is expected to take anywhere from six months to a year. But the governor is hoping to have a draft rule by early 2020.

Whitmer’s office has indicated that the Trump rule leaves out about 200,000 workers in Michigan that the Obama proposal would have applied to, giving a sense of how many employees in the state might be covered by the regulations she is backing.

Elected in 2018, Whitmer is a Democrat, but both chambers of the Michigan state Legislature are controlled by Republicans. The governor’s office believes she has the legal authority to change the overtime rules without the Legislature granting approval.

Studley, with the Chamber, questioned whether Whitmer may have timed the release of her plan to distract from clashes the governor has been having with GOP lawmakers over budget issues. 

The Michigan overtime proposal also comes at a time when income inequality is a hot topic among Democrats vying for their party’s 2020 presidential nomination. 

And the state level pay frameworks are moving forward as left-leaning states have proceeded in recent months with other policies meant to give a boost to workers—perhaps most notably a union-backed measure in California that sets new restrictions for when companies can classify employees as independent contractors.

Rod Kloha, a small business owner in Midland, Michigan, is tracking what’s happening with the overtime rules in his state. Kloha owns Circle K Service, which has about 20 employees and maintains fleets of vehicles for other companies and also sells fire trucks.

Kloha said he hires salaried workers with the expectation that they’ll put in about 45 hours per week. Two of his employees would be affected if the overtime threshold is raised to $51,000, he said, and one more would be if it’s raised to $60,000.

“Basically what I’d end up having to do is I’d most likely change them to hourly,” he said, noting that this would mean less flexibility for how these employees structure their time. As it stands, he said, people might log long hours one week, and take an afternoon off the next.

“I can only pay so much for things without either raising rates a lot or making changes and cuts in benefits, or something else, to keep the pay the same,” Kloha said. “I don’t think I could raise my rates enough to offset that kind of cost,” he added. “I’d lose business.”