Obama's Overtime Edict------Double Trouble, Not More Pay

 

Last week the White House updated the Fair Labor Standards Act’s (FLSA) overtime regulations, raising the threshold at which salaried employees are exempt from overtime pay, effective December 1, 2016. According to the updated requirements, salaried employees making up to $913 per week ($47,476 annually) will now qualify for overtime compensation of 1.5 times their normal pay. This is a significant increase from the previous $455 per week ($23,660 annually) exemption level.  While Vice President Joe Biden has claimed that new rule is aimed at “restoring and expanding access to the middle class,” raising the exemption threshold is liable to have a slew of negative effects on the middle class. The NCPA published an issue brief on the expected effects of proposed overtime changes last December, but the official adoption of the new rule calls for revisiting its projected impact.

The administration predicts that the new rule will put $12 billion in the pockets of 4.2 million new eligible employees over ten years.  Such a dramatic increase in wages is too high a price for businesses to absorb without adjusting their compensation model. It is inevitable that businesses will make changes to offset these costs.

What are these changes likely to be and how will they affect middle class earners? A case study of the restaurant and retail industry performed by Oxford Economics outlined three possible ways that employers may offset increased costs: by lowering hourly wages, cutting benefits and bonuses and reducing workers’ hours.

  • Employers may begin paying more employees hourly wages, as opposed to salaries, decreasing their hourly wages to compensate for their overtime pay. The College and University Professional Association for Human Resources already stated the rule will result in colleges being forced to reclassify salaried workers as hourly employees. While employees may not lose income per se, they will face other inconveniences, like having to meticulously record hours. Furthermore, salaried jobs are often preferred to hourly wages, as they benefit both individuals and institutions
  • Additionally, employers are likely to cut employee benefits. Some may add the value of benefits to base salaries to push salaries beyond the exemption threshold. Others may cut benefits for employees working overtime, in order to offset their added pay. According to the NCPA’s analysis, first line supervisors in food prep who received overtime compensation were less likely to receive pension benefits than their overtime exempt counterparts, suggesting a tradeoff between overtime pay and benefits.
  • Finally, employers are likely to reduce the hours of their employees, making them part-time employees ineligible for overtime compensation. They will then bolster their workforce by hiring additional part-time, entry-level workers. Thus, new low-paying jobs may open up at the expense of middle-class employees’ salaries.

Perhaps more startlingly than the ways the new rule may hurt current employees is the administration’s flawed rationale for the rule. As commentators have been quick to note, the purported benefits of the rule change do not match the problem as described by the administration. The White House cites a shrinking middle class and low wages for middle and working class families as the background for this initiative. Given that 60 percent of the affected employees don’t work more than 40 hours per week, giving additional overtime compensation doesn’t address this problem. As demonstrated, middle-earning employees are unlikely to benefit; the middle class will certainly not grow. The new rules may simply create more low-paying jobs (at the expense of middle-class salaries) and prevent employers from overworking employees. This is certainly a solution in search of a problem.

Danielle Zaychik is a research associate with the National Center for Policy Analysis.

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