President Barack Obama recently directed an overhaul of overtime pay rules in a move to allow potentially millions more workers to qualify for time-and-a-half pay.
Business groups already are warning the decision could backfire on workers, but Obama pledged to work with both businesses and workers as the new rules are crafted.
“We’ve got to build an economy that works for everybody, not just for a few,” the President said about the move. “Today, I’m gonna use my pen to give more Americans the chance to earn overtime pay that they deserve…If you have to work more, you should get paid more.”
Obama signed a presidential memorandum directing the Labor Department to propose rules that expand the number of employees who benefit from overtime pay. It marked one of Obama’s widest-reaching executive actions so far—especially in the realm of business
The rules would be aimed at salaried workers who make more than $455 a week and those who are ineligible for overtime because they are designated as management even though their supervisory duties are minimal.
These rules do not require Congressional action but could take more than a year to implement.
Obama has put a focus this year on increasing worker pay, including a call for Congress to increase the federal minimum wage from $7.25 an hour to $10.10. He also issued an executive order requiring federal contractors to abide by the higher minimum wage.
In his memorandum, Obama directed the Labor Department to recommend new regulations that could increase the salary threshold for overtime eligibility and to change the definition of what constitutes a supervisor.
Politically, this most recent move is seen by many as President Obama’s attention to overtime regs coinciding with his emphasis on equalizing income disparities, a theme that he has said will be central to the remainder of his presidential term.
It also serves his political ends during a midterm election year, giving him a populist issue along with his calls for a higher minimum wage and better pay for women. as well as giving presumptive Democratic presidential nominee Hillary Clinton an issue to gain traction with.
The salary-per-week limit separating those who get overtime and those who don’t was increased to $455 in 2004 during the Bush administration. At the time, it hadn’t been increased since the mid-1970s.
“What we know right now is the threshold has been eroded by inflation, and there 3.1 million people who, if the threshold had kept up just with inflation, would automatically be covered by overtime provisions,” said Betsey Stevenson, a member of Obama’s Council of Economic Advisers.
The proposals are being met with empirical skepticism.
Business groups around the nation are responding that any forced increase in wages has consequences that could affect employment, prices and the survival of certain companies which, they said, already have to comply with requirements of a new health care law which are increasingly burdensome.
“Similar to minimum wage, these changes in overtime rules will fall most harshly on small- and medium-sized businesses, who are already trying to figure out the impact of Obamacare on them,” said Marc Freedman, executive director of Labor Law Policy for the U.S. Chamber of Commerce
“This is going to be especially difficult for small businesses in small markets where wages are commensurate with the cost of living,” said Beth Melito, Senior Legal Cousel for the National Federation of Independent Businesses. .
“Promoting someone to manager is going to be an expensive proposition for many small businesses, and the result will be less mobility and fewer opportunities for workers at the bottom,” Milito added.
Under current rules, managers earning more than $23,660 per year are exempt from the overtime requirement. These individuals don’t have to be paid time and a half, in other words, for working more than 40 hours per week.
The new rule raises the threshold to $50,440, which means that many more employees will be eligible for overtime.
“That’s a very big expense for small restaurants and retailers, and the businesses that will be hit hardest are in parts of the country where the cost of living is low,” said Milito. “Employers will be forced to limit hours for their workers and eliminate management positions.”
According to NFIB, the rule is the latest in a string of sweet-sounding, well-meaning regulations pushed by unions and loved by politicians and bureaucrats who don’t know the first thing about running a business.
“Whether it’s mandatory paid time off, mandatory higher wages, fixed work schedules or the overtime rule, this administration is regulating away the ability of local business owners to manage their own employees,” said Milito.
She adds that, “Employers attempting to understand new overtime rules face the threat of punitive treble damages for honest mistakes or good-faith compensation disputes. This is exactly the sort of scenario that should prompt legislators to limit the 2008 treble damages law to willful violations.”
New government regulations intended to grant overtime pay to more salaried workers could backfire, Heritage Foundation labor expert James Sherk warns.
“For one thing, the change probably wouldn’t increase a worker’s take-home pay. Many employers compensate for increased overtime by simply lowering their workers’ base pay to keep total compensation intact,” Sherk notes.
The regulations would also “effectively turn millions of salaried employees into hourly workers,” Sherk points out, since businesses would be forced to track precise hours worked. And this could mean that flex time, working from home, and other modern business arrangements would be off-limits.
“Most employers deny overtime-eligible workers this flexibility” to work remotely, Sherk has written.“They must track time worked or risk expensive lawsuits over back pay.”
In today’s economy, determining what is overtime and what isn’t is not entirely straightforward. Some workers value flexibility to work on weekends and at odd hours, which employers can compensate through additional vacation days or higher bonuses.
Imposing a rigid structure on the exact form of compensation or the nature of the employer-employee relationship is unlikely to be beneficial to workers or employers in the long-run according to many labor experts and economists.
These new regulations will also impose incremental costs on employers by requiring them to make additional payments to workers that put in more than 40 hours per week.
Employers can respond to these higher costs in several ways.
First, they can cut the base or regular wage for workers who will likely receive these overtime payments. Second, they can cut existing workers’ hours and hire new workers who will also work fewer than 40 hours per week. Third, they can cut their hours or their jobs entirely and invest in a machine that can do the same job, perhaps more cheaply. Fourth, they can keep the workers but pass on the costs to consumers in the form of higher prices. Fifth, they can keep the workers, pay them the time and a half premium and bear the brunt of the higher costs.
Which of these scenarios is the most likely for the firms and companies to follow?
A recent study found that many firms, in response to 2004 regulation changes in overtime pay, lowered the base wage in jobs that often required overtime work in order to offset the new higher costs of overtime pay. In particular, workers in minimum wage or near-minimum wage jobs were given fewer overtime hours by their employers. This is likely because at that wage level, employers can no longer adjust wages downward so they are more likely to cut overtime use.
Jeffrey Miron, director of economic studies at the Cato Institute and the director of undergraduate studies in the Department of Economics at Harvard University has written that “President Obama plans to raise the salary threshold at which employers must pay time-and-half for overtime hours (normally defined as those above 40 hours per week). Currently these rules apply to workers with annual salaries up to $23,660; the President’s proposal raises this threshold to $50,400. The new rules will affect about five milllion workers according to administration estimates”
And what impact will this expanded regulation have on the labor market?
“In the very short run, employers affected by this expansion may have little choice but to pay their employees higher total compensation; in the very short run, employers have few ways to avoid this added cost,” Miron noted.
“But in the medium term, employers will invoke a host of methods to offset these costs: re-arranging employee work schedules so that fewer hit 40 hours; laying off employees who work more than 40 hours; or pushing such employees to work overtime hours off the books.”
And in the longer term, employers can simply reduce the base wages they pay so that, even with overtime pay, total compensation for an employee working more than 40 hours is no different than before the overtime expansion according to research conducted.
In summary, it would appear that expanded overtime regulation will benefit some employees in the very short term; cost others their jobs or lower their compensation in the medium term; and have no meaningful impact on anything in the long term.
How can this be perceived as a victory for the American middle class which is already facing possible extinction according to various social and economic reports?
The proposed new changes will call into question work done away from the office, such as late night emails or even taking phone calls.
There have been some who have heralded the possible changes as a positive move. Thomas Kochan, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, was quoted recently in The Wall Street Journal as saying the new rules could force companies to work more efficiently.
“These kinds of changes historically, while they sound like they’re going to be costly, lead management to look for more efficient ways of doing their business,” say Kochan. “That helps drive up productivity.”
Some local business leaders in central Mississippi disagree.
“The onslaught of regulations from Washington is crippling small business and impeding our economy,” states Gerard Gibert, CEO of Venture Technologies based in Ridgeland.
“Obamacare, Dodd-Frank, EPA and now new proposed overtime rules from the Department of Labor all but require full-time lawyers, accountants and consultants to ensure compliance. The fundamental problem is that government bureaucrats presume that every private sector entity is corrupt and that government strong-arming is necessary to ensure fairness.
A robust free market is the best arbitrator of employers/employee relationships,” he concludes.
Greg McLemore, COO of AmFed, also in Ridgeland, would seem to agree with Gibert’s assessment.
“The administration has given no consideration to how the increased salary threshold will impact the professional employees work remotely from home. These professional employees balance their home life with work and don’t punch a clock or work a standard schedule. A stay-at-home parent fluidly blends their work and personal responsibilities and it is virtually impossible to estimate the actual time that they effectively spend working,” McLemore says.
“With the lawsuits that are already being planned by the plaintiff bar, companies like ours will be forced to reconsider whether we can continue to allow some of our employees to work at home,” McLemore went on to say. “Instead we will have to force them to return to the office and punch a clock.”
Not all local businesspeople contacted were as pessimistic however, Shonda Kines is Manager, Human Resources, at Southern Farm Bureau headquarters in Jackson, MS.
“I attended the Society for Human Resource Management (SHRM) Leadership Conference in November 2014,” Kine says. “This conference is held in Washington, D.C. and one of the conference activities is to visit the office of the Senators and Representatives from your state. This is one of the topics we discussed during the visits. I think there is a chance that the proposed changes will be implemented.”
When asked what the effects of the changes would mean to Southern Farm Bureau specifically, Kines responded, “Due to the type company we are, this will not have a large effect on our us. We would have approximately an additional 10% or our employees eligible for overtime pay. A large portion of that 10% does not work a lot of overtime”.
Kines sees the following taking place if the proposals go through: “I do think there should be an increase. The overtime salary exemption amount of $23,660 has not changed since the early 70’s, but approximately a 50% increase to $50,440 is extreme. This change will have a greater impact on the restaurant/retail industry. To combat the change, I think companies will have more part-time workers and decrease their full-time employee numbers. Companies will also work harder to reduce their overtime costs.”
The Wall Street Journal
National Federation of Independent Businesses
The Hertiage Foundation
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