The Obama administration claims that millions of salaried workers will get a raise under the new Department of Labor overtime rule. But a wage increase for salaried workers was never the purpose of the rule, as the agency itself acknowledges.
The final rule, released May 18, says that requiring overtime for hours worked over 40 per week is grounded by two “policy objectives”: One, “spread employment… by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours.” Two, “reduce overwork and its detrimental effect on the health and well-being of workers.”
Notice that giving workers a raise is not mentioned. And the second policy objective—reduce overwork—is not a problem most salaried workers face, according to the Labor Department’s own data. The data show 60 percent of salaried workers do not work more than 40 hours a week, and only 20 percent regularly work overtime.
Technically, the overtime rule greatly increases the number of salaried workers who qualify for overtime pay, raising the salary threshold from $23,660 to $47,476. That amount will rise every three years to match the 40th percentile of salaried employees in the lowest income region, normally the southeast. The administration projects 4.2 million employees will become newly qualified for overtime pay. That level of increase is unprecedented in the near 80-year history of the Fair Labor Standards Act (FLSA).
But, as regulators seem to tacitly acknowledge, employers will face pressure to avoid those huge cost increases. In fact, employers can take various measures to comply with the rule other than increasing wages. They can reduce salaries to offset the cost of overtime or demote workers to hourly status and reduce workers’ hours. People who remain salaried employees and qualify for overtime may see benefits disappear. To control costs, employers will likely cut back on health care benefits, paid leave, and restrict flexibility work schedules since more employees’ hours will need to be tracked and recorded.
One big problem with the Obama administration’s policy objectives is it interferes with people’s ability to determine their own work goals and choices. No longer will employers allow a driven employee to work long hours to get ahead. The employee with great aspirations will find the overtime rule a roadblock to such career pursuits. Not to mention, employee morale is likely to take a hit as salaried employees who have not punched a clock in years are forced to do so.
Another big problem is regulatory compliance costs foisted on employers. With more employees no longer exempt from overtime pay, the pool of employees that employers are responsible for tracking and recording their hours will increase. In the first year, the agency estimates direct costs to employers at $677 million. Another cost, which the agency mentions in its final rule, is that employers will be dealing with a surge of lawsuits. Bloomberg BNA recently posted a story that cites plaintiff lawyers are already preparing outreach to employees to educate them on the new overtime rule.
Will Congress save us from the regulators? Speaker Paul Ryan (R-Wisc.) said the overtime rule is "an absolute disaster for our economy" and Republicans are “committed to fighting” the rule. Already, as Politico reports, Senator Lamar Alexander (R-Tenn.) will submit a resolution of disapproval against the DOL’s overtime rule under the Congressional Review Act. Already in the hopper is the Protecting Workplace Advancement and Opportunity Act (PWAOA), sponsored by Senator Tim Scott (R-S.C.) and Congressman Tim Walberg (R-Mich.), respectively, which would nullify the overtime rule and require the DOL to go back to the drawing board to take into account the vast cost-of-living differences across the country and impact on small businesses.
Hopefully, Congress will succeed in blocking the rule, which is misguided and a poor vehicle to increase wages. Instead of benefiting workers, the rule reduces flexible schedules, leads to demotions, and significantly burdens small businesses and non-profits that are ill-equipped to handle the added costs of doing business.
Ultimately, the overtime rule does more harm than good.
Trey Kovacs is a policy analyst specializing in labor policy for the Competitive Enterprise Institute.