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Labor Department Issues Costly Overtime Rule

Thursday, June 2, 2016 9:01
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The Obama administration envisions it as the middle class getting a raise.  The details suggest a demotion.  On May 18, the Department of Labor published a final rule hiking the income ceiling for overtime pay eligibility among salaried employees from $23,660 to $47,476.  Set to go into effect December 1, the regulation would benefit an estimated 4.2 million workers.  However, it also could produce a number of unintended consequences.  They include:  loss of scheduling flexibility; reduced benefits; fewer weekly work hours; higher employer compliance costs; and increased litigation.  Several lawmakers, led by Sen. Tim Scott, R-S.C., and Rep. Tim Walberg, R-Mich., have responded with legislation that would nullify the rule and make it difficult for the DOL to offer a substitute.

The mandate originated with an executive order from President Obama on March 13, 2014.  Obama had directed the Labor Department, pursuant to the Fair Labor Standards Act, to draft a rule to expand the overtime pay eligibility of salaried employees.  The prevailing maximum threshold of $23,660 a year ($455 a week) would rise to $50,440 a year ($970 a week).  Those meeting the new standard would be converted to hourly status and receive “time-and-a-half” for work beyond 40 hours in a given week.  The proposal was part of a broad administration effort to promote economic equality.  The previous month Obama had signed an executive order raising the minimum wage for employees of federal contractors from $7.25 per hour to $10.10 per hour.  And the proposed White House budget for Fiscal Year 2015 proposed expanding the Earned Income Tax Credit through a combination of broadened eligibility and larger credits for persons already eligible.  The changes to the EITC would benefit a combined 13.5 million workers.        

At the White House ceremony introducing the overtime rule, President Obama declared:  “Overtime is a pretty simple idea.  If you have to work more, you should get paid more.”  Weeks earlier, during his State of the Union Address, he stated:  “The cold, hard fact is that even in the midst of recovery too many Americans are working more than ever just to get by, let alone get ahead.  And too many still aren’t working at all.”  Labor Secretary Thomas Perez emphasized the role of unions in reversing economic hardship.  At the AFL-CIO convention in Los Angeles the previous September, he remarked:  “Strong unions reduce inequality and build the middle class.”  The AFL-CIO itself declared on its website:  “It is time to update those (overtime salary threshold) levels and index them to prevent more and more workers from losing overtime protection every year.”

The Labor Department duly went about drafting a rule.  And over a year later, on June 30, 2015, the department submitted a Notice of Proposed Rulemaking reflecting the contents of the February 2014 announcement.  Nearly 300,000 public comments poured in, by any standard a staggering volume for any rule change.  Finalizing the proposal was no simple task.  But it is now a reality.  On May 18, the DOL published a regulation raising the maximum salary threshold for overtime eligibility from $23,660 to $47,476 – not quite the original level of $50,440, but high enough to benefit 4.2 million workers.  The rule applies to businesses with at least $500,000 worth of annual sales.  The $47,476 threshold will be upgraded every three years, based on the assumption that it should be maintained at the 40th percentile of full-time salaried workers in the lowest income region of the country.  The rule also raises the “highly compensated employee” overtime threshold from the existing $100,000 to $134,004; above the latter figure, employers won’t have to show more than minimal proof of non-eligibility.  As employers would need time to prepare for all this, the rule will take effect on December 1, 2016.     

On the surface, the action seems overdue.  Supporters noted that the income threshold for salaried employees had not been raised since 2004.  White House economic adviser Betsey Stevenson said that if the income ceiling had kept pace with inflation, 3.1 million additional workers now would be covered.  Last July, in a speech in La Crosse, Wisconsin, as the details were being worked out, President Obama remarked:  “We’re making more workers eligible for the overtime that you’ve earned.  And it’s one of the single most important steps we can take to help grow middle-class wages.” 

Capitol Hill progressives are delighted, and indeed saw the move coming months ago.  In a February 29 letter to Secretary of Labor Thomas Perez, two dozen senators, including Democratic presidential candidate Bernie Sanders, called upon the Labor Department to put the overtime rule on the fast track.  “As our economy continues to recover from the Great Recession, we, as a country, need to work on ways to help our economy grow from the middle out, not the top down,” the letter read.  “But today, despite longer hours and higher productivity, workers’ wages have remained virtually unchanged.  Millions of people are working harder than ever without basic overtime protections.  We applaud the Department of Labor’s move to update the overtime pay threshold, and we are writing to request that you quickly signalize the rule to ensure millions of workers are paid fairly for the hours they work.”  Organized labor likewise is on board.  On May 18, Service Employees International Union President Mary Kay Henry had this to say:  “Working women and men should be paid for the time they work, period.  The Obama administration’s decision to increase the overtime threshold is an enormous, in many cases life-changing, win for working people.”

These comments have a facile, interchangeable quality.  As such, they ought to invite skepticism.  And skepticism not only should be directed at the wisdom of a given increase in eligibility, but indeed at the very principle of mandatory salary-to-hourly wage conversion.  Back in April 2014, one month after President Obama’s executive order that got the ball rolling, in fact, National Legal and Policy Center criticized at length the proposed rule change.  The following is a recapitulation and update of that critique. 

First, forcing employers to pay eligible employees on the basis of hourly overtime is likely to depress rather than raise pay.  While the rule change will result in a projected $12 billion wage hike over the next decade, that administration-derived figure overlooks some hidden factors.  Not all employees will have the opportunity to work overtime.  And not all would necessarily take advantage of the opportunity.  Fear of a pay cut may offset the desire for overtime income.  U.S. Bureau of Labor Statistics economist Anthony Barkume estimates that employers would recoup about 80 percent of overtime costs by reducing wages.  If cutting pay isn’t a viable option, employers can substitute part-time workers for full-time ones.  And in lieu of that, they can redefine a full-time job as less than 40 hours a week.  Moreover, employers can reduce benefits rather than wages.  And as another option, they can raise salaries near the $47,476 ceiling to something just above it.  Would the Labor Department crack down on employers who exercise one or more of these options?  In any labor market, an employee gets paid on the basis of the employer’s assessment of the value that person adds to the enterprise.  A rise in compensation without an accompanying rise in productivity is an invitation to skirting the law among employers and employees alike.           

Second, affected workers may have far less flexibility in scheduling work hours.  It is intuitive that when an employer pays a worker by the hour, he has an added incentive to monitor that employee’s working hours.  The employer wants to make sure he isn’t paying for hours not worked.  Whether one considers time flexibility a necessity or a perk, the rule change will sharply reduce opportunities for certain professional employees and junior managers to run errands and deal with personal emergencies, especially if they have minor children.  Busy employees will discover that they won’t have the time during a workday to make that trip to the bank, the post office, the car repair shop or the doctor’s office.  Employees seeking to take such trips would need permission from their supervisor.  And if they take them, the result would be lost compensation.  The rule also would discourage employees from working at home via computer and telecommuting.  A 2011 survey of member companies by the HR Policy Association concluded that, in response to this prospect, nearly a third of all respondents restricted employee telecommuting and over half of them curbed the use of communication devices outside the office.

Third, the rule change may delay career advancement for younger salaried employees.  Getting paid an annual salary, as opposed to an hourly wage, connotes status.  Conversely, being paid by the hour connotes a lack or loss of status.  Many employees may decline opportunities to work overtime, knowing that the extra money they make could be offset by the income they forgo over the long run.  As they see would see it, why jeopardize their career fast track for some short-term satisfaction? 


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