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July 27, 2015

New Federal Overtime Regulation Will Increase Costs, Hurt Employees

Earlier this month, Connecting the Dots reported the U.S. Department of Labor (DOL) released a proposed regulation that would increase the threshold for which salaried workers are eligible for overtime compensation from $455 weekly to about $970 weekly. Over the last few weeks, individuals and business advocacy groups that have analyzed the proposal have found it would reduce employment and increase the cost of doing business. 

A key argument is that the rules will reduce overall employment levels and limit workers’ hours and wages. For example, American Enterprise Institute Resident Scholar Aparna Mathur looked at studies of past regulations and found:

  • A 2010 study found employers facing overtime rules either cut employees’ hours or lowered employees’ base wages so they would not hit the threshold to which the rules applied.
  • A 1998 study found that, between 1938 and 1950, wholesale trade workers who were subject to Fair Labor Standards Act overtime rules had their average weekly hours cut while retail workers, who weren’t subject to rules, did not.

U.S. Chamber of Commerce Senior Vice President Of Labor, Immigration And Employee Benefits Randy Johnson argued workers would be facing the same outcome with these rules. He also argued the DOL’s proposal would be especially harmful to small businesses. Johnson said, “Making more employees eligible for overtime by severely restricting the exemptions will not guarantee more income, but instead will negatively impact small businesses and drastically limit employment opportunities.” 

Indeed, it seems like businesses are already working to put into place programs that would help them better track workers’ hours, potentially in order to limit them. In a front-page story last week, The Wall Street Journal reported, “Some firms are installing software that alerts managers when workers are at risk of running up overtime pay, while others are evaluating which staffers should receive salaries and which should switch to hourly pay. And others may discourage checking email after working hours.” The Journal noted that strict overtime rules in place in California have already compelled businesses to become more strict about tracking workers’ hours and limiting them. The Department of Labor estimated the administrative costs to businesses to comply with the rule will total about $593 million in the first year alone. 

How will this rule affect the metals and manufacturing industries? While the National Association of Manufacturers (NAM) strongly opposes this rule, some analysts have argued it will not have a huge impact on manufacturers. It will, however, affect other parts of the supply chain. For example, Alabama lawyer Bryance Metheny, who represents manufacturing clients, told IndustryWeek the rule would affect auto suppliers because their salaried supervisors would likely fall below the new overtime threshold. Metheny said employers would either move these workers to salaried workers eligible for overtime or raise the workers’ salaries just enough so that they won’t be eligible for overtime. Metheny believes the most likely outcome will be to raise salaries. While this move would contain the financial impact to employers, it would keep workers from receiving what the DOL and labor advocates say will be a significant bump in compensation. Metheny said, “There’s such a big advantage to an employer to have those positions as exempt, because if the machine goes down and chaos ensues and it takes a lot of time to put it back together, they don’t have to worry about how much overtime they’re going to have to pay.” 

According to Politico’s “Morning Shift,” House and Senate Democrats are squarely behind the rule. Last week, 113 Democratic House members and 31 senators sent a letter to President Barack Obama asking him to keep the rule moving forward. Republicans, meanwhile, have said they are willing to look at revising current overtime regulations, but do not support the White House’s current proposal. In a statement, House Education and the Workforce Committee Chairman John Kline (R-MN) and Workforce Protections Subcommittee Chairman Tim Walberg (R-MI) said, “We have said repeatedly that we would support a responsible effort to streamline and modernize existing overtime rules and regulations. No worker should be deprived of his or her fair share because of a broken regulatory system. Unfortunately, this proposal is a missed opportunity. It will increase costs on small businesses, make it harder for workers to advance up the economic ladder, and do nothing to address the complexity of the regulations or reduce unnecessary litigation.” 

As a reminder, interested parties have until Sept. 4, 2015 to comment on the DOL’s proposed standards. Instructions for doing so are available here. Importantly, the proposed regulation contains no specific changes to the “duties test,” which defines which employees would be exempt from the new standards. The DOL specifically said it would like to hear from the public about how best to alter the test, which indicates it is open to altering, and perhaps broadening, it.