May 18, 2016

Obama Administration’s New Overtime Rule Will Hurt the Most Vulnerable

Post by Paige Agostin

Bureaucrats at the federal Department of Labor (DOL) are likely to release yet another regulation today. This time, it is the administration’s final overtime rule, which will limit workers’ flexibility and reduce opportunities for the most vulnerable.

Under the rule, the current salary threshold under which overtime must be paid, will more than double, increasing from $23,660 to $47,500, forcing millions of workers to shift from a salaried position to hourly and or have their hours reduced. The rule displays a fundamental misunderstanding of labor markets, with consequences that will be detrimental to both employers and employees.

No doubt, Washington bureaucrats will argue that their rule will only result in bigger paychecks for hardworking Americans. Who could be against that?  But simply commanding something, does not actually make it so. Helpful analysis by the Mercatus Center at George Mason University outlined the likely consequences of this overtime rule. As we’ve seen time and again, the consequences are worse than the problems the bureaucrats were attempting to address in the first place—especially for the least advantaged.

DOL’s decision is clearly based on data that is deficient in several respects, largely focusing its cost-benefit analysis only on the manufacturing sector, leading to a one-size fits all rule. That’s simply unworkable in the dynamic information economy of 21st century America. Particularly striking is DOL’s failure to address how the rule would impact entrepreneurs, tech start-ups, and those jobs that include telecommuting. For example, the legal fees associated with cost of compliance on tech start-ups is estimated to be between $2 billion and $4.5 billion. Another aspect, unique to the tech industry, is that while employees are paid lower starting salaries, they also receive equity in the firm. This is a major incentive for those pursuing advancement within a start-up.

Nonprofits and charities, universities, and small businesses will also be negatively impacted by extreme increases in labor costs, costs they simply cannot afford. In response, these types of organizations may be forced to cut support services, raise tuition, and demote or let go employees and scale back hours. The retail and restaurant industry alone expect lost earnings of $2.32 billion due to reduced hours.

Consider also the university researcher, who works more than 40 hours as part of their academic program. They may be forced to stop researching or the university will have to increase tuition to cover the cost of overtime pay. Or, consider the small business employee whose base pay maybe lowered to offset the cost of paying them overtime, or who will be demoted from a salaried to hourly position. The difference between salary and hourly, and associated variance of benefits and flexible leave time, is no small thing for many workers. It is often a deciding factor on where a person chooses to work.

Put simply, under the rule, federal regulators ignore the real-world consequences to the detriment of millions of hardworking Americans. Washington bureaucrats presume to know what are appropriate compensation and benefits levels for every job across the country. They also presume to know exactly how labor markets will respond to their tinkering. This is absurd. The rule does not account for differences in cost of living, and differences in what employees’ value. It limits flexibility and opportunities for advancement for millions of workers.

As one of the last regulations that this administration will issue, it is unfortunately business as usual. Because of regulations like this, President Obama has presided over an economy with slower annual growth than at any other time since World War II. Congress should use every tool at its disposal, including a resolution of disapproval under the Congressional Review Act, to block this regulation and hold this administration accountable.