Last week, the federal government unveiled new overtime rules for full-time salaried employees. As of December 1, anyone in that category making up to $47,476 a year will be eligible for overtime pay, and the Department of Labor projects that 4.2 million people will receive a boost to their incomes as a result.
This new threshold more than doubles the old one, which was set at $23,660 back in 2004. The federal government is anticipating a similarly substantial impact on the number of people who qualify for overtime. It forecasts that 35% of full-time salaried employees will be eligible for extra pay if they work outside their regular hours—five times the current 7%.
But where will these changes have the most impact? And what are the potential benefits and risks to employers and employees? Let’s take a closer look at the data.
Is the government’s 35% forecast too modest?
To learn more about which jobs will be affected by this change in overtime rules, we focused on new job postings available on Indeed that fall within the salary range of the revised regulations, based on the Bureau of Labor Statistics' median salaries and occupation categories. This analysis is different from and complementary to the government’s analysis. While the government's analysis looks at current employment, analysis of job postings is forward looking.
The result? We found that 39% of job postings in the US fall into the range of salaried workers who could be impacted by the overtime pay rule. That’s 4% higher than the Department of Labor’s estimate based on current employment and suggests that the changes could have a larger impact than expected.
However, there are good reasons not to read too much into the difference between the government forecast and job openings. The ultimate number of affected jobs may turn out to be lower—some jobs, even without the new rule, may pay above the cut-off rate by the time the hire is made while others may not be filled.
It’s when we dig into the regional data that the picture really gets interesting.
The top 10 states most affected by the new federal overtime rules
Here we see that poorer, more sparsely populated, rural states with comparatively high rates of unemployment will be most strongly impacted by the new rules.
West Virginia is the most affected state, with 53.1% of job postings subject to the new overtime rules. Mississippi comes in second at 52.4%, and Arkansas places third at 52.2%. The rest of the top 10 is filled out by southern and midwestern states, six of which currently have unemployment rates higher than the national average (5% in April 2016).
Of course, the cost of living is on average lower in the south and midwest—and so are salaries. Nobody would deny that $47,476 goes much farther in Charleston, West Virginia than it does in New York City. Therefore low cost-of-living states are likely to be disproportionately affected by the new federal overtime rules based on a national average. In these places, employees and employers alike will feel the most impact—both positive and negative—from the changes.
The top 10 states least affected by the new federal overtime rules
As for states that are least affected, we see a very different list.
This list mostly comprises more populated, urbanized states with higher costs of living and lower rates of unemployment. Only four of the states on this list have unemployment rates higher than the national average, and only one (Alaska) has an unemployment rate above 6%. In fact, since living costs tend to be higher in these states, some workers might argue the cut-off point should be even higher.
What effects will these changes have on employment?
So what is likely to happen when the new rules come into play?
Well, certainly some workers who do not currently receive extra pay for overtime will start getting it, and so this policy is good news for them. And others will get a salary bump to cross the $47,476 threshold and continue working longer hours.
Another possibility is that some employers will hire more people so they can avoid paying overtime. As a result, there could be more jobs for more people, but fewer opportunities for those already employed to take on extra work to boost their incomes. With job postings in many industries at record highs, there are already more jobs out there than there have been in a long time, which suggests employers may have challenges filling additional roles.
Then, of course, there is another possibility: Employers will cut back on hiring or benefits (or both) because workers have become more expensive.
Interestingly, research from the UK has indicated that raising overtime rates can reduce base rates for new hires. In fact, according to one study, when overtime is accounted for, average hourly wage earnings are fairly uniform across firms in a given industry.
Why? Because firms paying wages below market level tend to award above market level overtime premiums, while firms paying above market level wages are less competitive when it comes to overtime rates. In other words, it all evens out in the end.