The Department of Labor will soon announce new, complex rules on overtime pay, fulfilling President Obama’s 2014 promise to raise the salary level at which employers are required to pay overtime. The rules, which will limit flexibility in the workplace, will likely double the existing $23,660 salary level at which employers have to pay overtime to $50,440, unless the employee is in a managerial or supervisory role.
Proposed rules were published last summer, and the final rule is now being reviewed at the Office of Management and Budget prior to final release. Since rules issued after May 16 can under some circumstances be reviewed and repealed by the next administration through the Congressional Review Act, the Labor Department will try to release the final rule before mid-May.
The rationale for the new rule, which is derived from provisions in the Fair Labor Standards Act of 1938, was set out by the president in an interview with the Huffington Post in 2015. He said, “What we’ve seen is, increasingly, companies skirting basic overtime laws, calling somebody a manager when they’re stocking groceries and getting paid $30,000 a year. Those folks are being cheated.”
But studies have shown that raising the overtime pay ceiling will generally not raise workers’ overall compensation. Instead, employers will pay a lower base salary, so that with overtime, the pay packet is about the same. The affected workers, who earn between $24,000 and $50,000, are generally not getting minimum wage, so employers would be free to hire them at a lower initial rate of pay.
Bureau of Labor Statistics economist Anthony Barkume showed that employers lower base pay if they have to pay overtime. Jared Bernstein, former chief economist to Vice President Joe Biden, concluded that there would be no job losses because employers would just reduce wages in reaction to the rule. He writes, “So, an employer who views a new worker as worth $10/hr … and expects her to work 10 hours of [overtime] per week, would offer her a base wage … of $9.09.” Employees have to work overtime to stay even with their previous earnings, because their base pay is lower.
Another factor that holds down pay is technology, which can increasingly substitute for workers. Robots don’t have to be paid overtime. Some jobs can be outsourced to other countries with less onerous rules. Some businesses may find it is not worth providing services at times that would trigger the new rules. Customers will not receive the benefit of services, and workers will not receive the benefit of employment.
It will be difficult for employers to comply with these complex regulations, potentially leading to inadvertent mistakes and lawsuits. Many “non-hourly” workers who earn more than $50,000 per year will be eligible for overtime, as salary level is only one requirement for exemption. To be exempt from the overtime regulations, an employee must also meet a set of duties tests for each exemption. Some examples of salaried employees who routinely make over $50,000 and are not exempt include: inside sales, financial service, engineering technicians, and secretaries in cities such as New York and San Francisco.
Employees who must be paid overtime if they work more than 40 hours per week may be paid by the hour, on a salary, on 100% commissions, or by the piece (such as exercise instructors paid per class). Although most employees who need not be paid overtime must be paid a salary at the set minimum salary level, others, such as lawyers, doctors, some teachers, or outside sales employees, need not be. Certain computer employees who are not covered by the overtime rule can be paid a salary or by the hour.
As well as increasing the complexity of hiring for employers, the new rules will hurt workers who value job flexibility. Some parents value flexible jobs so that they have time for their families. If they are required to be paid overtime, they lose this advantage.
This is because workers who must be paid overtime cannot receive comp time — time off in exchange for extra hours worked. If they work Saturdays and Sundays, they have to be paid overtime — they cannot take Monday and Tuesday off in exchange. If they are paid only for the hours they actually work, they lose money every time they need to leave work early to care for a sick child or attend a school sporting event.
Since employers will be required to keep careful track of workers’ hours to avoid being sued for overtime violations, they might be unwilling to allow them to telecommute, a valued option for many workers.
Another group that values flexibility is millennials, those born between 1980 and 2000. Many prefer not to clock in and out of the workplaces, and like to work more hours on busy days and fewer when work is slow. Some do not even want to be tied to their offices. With the new rules, if I, as director of an economics research group, give my staff time off to travel to their families in exchange for longer hours, I would be breaking the law.
The choice of comp time instead of overtime pay is a valued perk that is available to upper-income earners, making their lives easier. It should also be available to lower-paid employees.
Those who designed the Fair Labor Standards Act in 1938 could not foresee the Internet, with its possibilities of telecommuting, the movement of women into the workforce, and flexible work schedules. The Labor Department should be embracing the 21st century, not returning to the 20th.
Diana Furchtgott-Roth is a senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter here.