3 Ways Obama’s New Overtime Rule Will Hurt Employees

Rachel Greszler / August 26, 2016

In an alleged attempt to increase the income of certain salaried employees, the Obama administration issued a new overtime rule, set to take effect Dec. 1, that will almost certainly do more harm than good for the employees it seeks to help.

Currently, employers only have to pay the overtime time-and-a-half rate to salaried employees who make less than $23,660 per year (as well as some who make more but don’t have sufficiently advanced job duties). The new rule more than doubles the pay level subject to overtime to $47,476.

This effectively means that many salaried employees can’t be paid to get a job done, but must instead be paid based on their hours.

Beginning in December, employees who make less than $47,767 a year must keep track of their hours and their employer must pay them time-and-a-half for any work over 40 hours per week.

Seems like it could benefit employees through higher pay, right? That’s what the Obama administration thinks. It claimed the rule will increase pay by an average of $1.2 billion per year across roughly 4.2 million workers (an extra $285 per worker).

But that assumption defies the economic literature. It effectively assumes employers have an extra $1.2 billion in spare change that they can dole out to employees without consequence.

Employees are likely to lose desired job flexibility and income dependability, and will likely have no additional income (maybe even less) to show for it.

Even left-leaning economists Jared Bernstein and Ross Eisenbrey acknowledge that’s not the case. They write that additional overtime costs “would ultimately be borne by workers as employers set base wages taking expected overtime pay into account.”

Another option for keeping total costs constant is to shift employees to hourly rates.

In the end, employees are likely to lose desired job flexibility and income dependability, and will likely have no additional income (maybe even less) to show for it:

1. Lost Flexibility. In today’s more service-oriented economy, the previous eight-hour work day has become less common as employees shift hours between days and weeks, and often perform work—such as responding to emails—outside the office and outside normal business hours. This flexibility gives employees greater autonomy and a better work-family balance. If employers must keep track of their employees’ hours and pay them time-and-a-half for any work over 40 hours in a given week, employers will limit employees’ flexibility. No more staying late a few nights one week in exchange for leaving early the following week, no more working from home where hours are more difficult to track, no more logging extra hours to cover for a co-worker (who would do the same in exchange), and potentially no more—or fewer—paid vacation days.
2. Less Stable Incomes. Salaries are beneficial for employees and employers alike. Salaries provide certainty of cost for employers and certainty of income for employees, allowing both to properly budget their resources. Salaries also allow employees to be paid to get a job done as opposed to having to log a certain number of hours. Many workers log fewer than 40 hours during less busy weeks or seasons and more than 40 hours in busy periods. Because most employers can’t afford—at least not without consequence—to pay employees with variable hours their existing base salaries as well as time-and-a-half when they work more than 40 hours, they will likely shift those employees to an hourly rate that results in roughly the same income for the year. But most employees prefer a regular paycheck over variable ones. After all, their mortgage or rent and most other expenses don’t vary from month-to-month.
3. Excessive Compliance Costs Likely to Reduce Wages. The Obama administration estimated employers will spend $295 million per year complying with the new regulation. The rule is unlikely to raise average wages as employers will reduce base pay or shift employees to hourly pay. But even if the rule raises wages by the administration’s unlikely estimate of $1.2 billion per year, $295 million in compliance costs amounts to an outrageously high 25 percent administrative fee. Those compliance costs will almost certainly be passed onto employees through lower wages.

Rather than intervene in mutually advantageous salary arrangements between employers and employees, the government should let employees agree to be paid to get a job done. The Obama administration’s paternalistic approach will ultimately hurt the employees it aims to help by limiting job flexibility, reducing income certainty, and potentially reducing incomes through excessive compliance costs.