New Overtime Rules Blocked For Now, But Uncertainty Weighs on Businesses

By Matt Kelly

CLOCK IN TIME: 6:10pm

Work in the United States may be about to change. The Department of Labor (DOL) has updated overtime rules relating to the Fair Labor Standards Act, and some changes could have a big impact on businesses’ labor costs. The rules were set to take effect on December 1, 2016, but a federal judge recently blocked their implementation. The DOL’s intent was to incentivize hiring and improve worker pay and well-being, but most empirical economic research suggests the new rules would do just the opposite.

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Hourly employees must be paid time and-a-half for hours worked over the standard forty per week according to federal guidelines. However, under current rules, salaried workers making more than $23,660 annually and having certain management-level duties are exempt from this regulation. The new DOL rule doubles that threshold to $47,476 and will automatically adjust it to the 40th percentile of wages going forward. Similar thresholds for employees with other duties would also increase, and also comprise some non-wage compensation. Some employees newly eligible for overtime protection would realize more income. Others will not, since employers can offset additional overtime costs at their expense. The DOL estimates 4.2 million employees will be immediately affected.

As a federal agency, the DOL was able to make the change without congressional approval. Initially, DOL recommended raising the threshold over $51,000, but lowered it somewhat after receiving 270,000 protesting letters and comments from businesses and industry groups.

Economic research suggests that most employers won’t increase pay as the DOL seems to expect. A 1991 article in the American Economic Review by Stephen Trejo found employers decreased base wages in response to similar overtime regulations. After including measures of non-wage compensation, Bureau of Labor economist Anthony Barkume of found a similar result. UCLA economist Dora L. Costa found employers instead decreased scheduled work hours in response to the Fair Labor Standards Act of 1938, and that these regulations disproportionately affected low-wage regions of the United States. Employers may also reduce fringe benefits, like bonuses, equity sharing, commissions, and contributions to health care or savings plans, or simply redefine employee duties, which can feel like a demotion. Employees making between $23,660 And $47,476 annually and who occasionally work overtime will suddenly become more expensive to employ, unless duties are redefined, base salaries lowered, hours reduced, or productivity increased. Workers may increasingly take a second job, as happened following overtime changes in Canada according to a 2001 article in Labour Economics.

Economists Don Boudreaux and Liya Palagashvili analyze the current proposed rule in a 2016 working paper and note the DOL hasn’t provided evidence an undercompensation problem even exists in the United States. Although inflation has eroded the impact of existing overtime regulation since 1975, income measures that include fringe benefits have kept pace with productivity. Economist Tyler Cowen finds that U.S. labor markets are extremely competitive, making widespread exploitation of workers unlikely, especially in the long-term.

Industry groups have also commented on the potentially damaging effects of the new rule. The National Retail Association (NRF) estimates the added costs of tracking hours and updating payroll systems alone will cost retailers $745 million. They also question the wisdom of setting the salary threshold nationally, since purchasing power varies so much across states. The Society for Human Resources Management has said most employees “won’t benefit from the change. Instead, they are likely to experience negative consequences of reclassification…” Given the secular decline in new business creation, now is probably not a good time to add barriers to entrepreneurship.

The overtime rules will have differential effects on industries. Those that can substitute capital equipment for labor will adjust more easily. Tech startups could be especially hurt, since their relatively limited access to capital leads them to more equity-sharing arrangements with employees, a practice that will be curbed by the rules. The NRF claims 64 percent of retail employees will be affected.

The recent injunction issued by Judge Amos L. Mazzant of the Eastern District of Texas temporarily suspends implementation of the rule, but it’s unclear what his final decision will be, or whether the DOL will appeal.

I would like to conclude on a positive note, but the clock is ticking…

CLOCK OUT TIME: 6:48pm

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
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