Labor Force / Regulation

Proposed Overtime Rule: Overestimated Benefits Fail to Justify Costs

This past summer, the Department of Labor (DOL) unveiled a proposed rule that could provide almost five million new workers with overtime protections. Currently, overtime regulations apply only to those earning $455 or lower weekly. If implemented, this new rule would increase the salary threshold up to $970 a week. This threshold is equivalent to the projected 40th percentile of weekly earnings for full-time salaried employees for 2016. With this new rule, the Obama three-women-and-one-man-working-in-office-725x483Administration hopes to give middle-class America a pay boost, but to what extent would this regulation change really benefit the newly covered workers? Additionally, would these benefits justify the enormous costs that would be imposed on businesses as well as the other negative effects that could be expected? The simple answer is no; this policy shift would be detrimental to our economy. Let’s examine why.

First, the actual benefits that would be realized for workers are less beneficial than originally advertised. Based on data from the Survey of Income and Program Participation, around 16 million employees earn between $455 and $970 per week (the threshold expansion range). Of those 16 million workers, only around 4.6 million are currently overtime exempt and would therefore begin to be compensated as a result of this rule change. The other 11.4 million employees in this income range are already non-exempt due to job duty requirements. Even though 4.6 million workers would become eligible for overtime with this rule change, it is estimated that only around 988,000 would take advantage of it. These are the employees (out of the 4.6 million) who currently tend to work more than 40 hours a week. By these calculations, the expected impact originally announced by the DOL of five million workers affected by the new rule is a significant overestimation.

Second, to comply with the proposed overtime rule, businesses would have to make certain cuts to afford the increase in costs. To provide overtime pay, employers would need to potentially decrease base pay wages as well as working hours. For the 4.6 million workers that could be eligible for overtime with this new rule, wages are expected to decline by 0.9 percent and hours are expected to decline by 0.2 percent. Additionally, a study was conducted in the state of Florida which anticipated that the rule would cost local small businesses (50 or fewer employees) around $243 million. With these high costs, businesses would be likely to slow down hiring and may even need to shut down in some cases. For example, back in July of 2015, Elizabeth Hays, director of human resources at Mars Home for Youth (MHY) Family Services, testified during a House subcommittee hearing, claiming that the proposed change would be highly damaging for organizations like MHY. She stated that the rule would put MHY at risk of having to shut down.

Lastly, expanding the overtime threshold would create further limits on flexibility in the workplace. Due to potential legal liabilities, employers tend to shut down communication with non-exempt employees during off hours. As such, this means that non-exempt employees are generally unable to have company-provided laptops, cellphones, etc. and cannot work remotely. With the proposed rule change, even more employees would be restricted in this manner. This could impact more workers than might be expected due to the changing nature of the workplace in which technology plays an increasingly important role for many different types of workers.

The narrow benefits and overwhelming costs predicted to be associated with this overtime rule provide evidence as to why this policy should not be implemented.

 

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One thought on “Proposed Overtime Rule: Overestimated Benefits Fail to Justify Costs

  1. While it is important to weigh the costs and benefits of any new regulation, your analysis in this blog post is extremely misleading. There are a number of instances where you mask the true magnitude of your statistics, presumably in order to advance a certain agenda. However, if you think critically about this issue, it’s clear that you vastly overstated the “negative” effects of this regulation.

    1. Your decision to limit the benefits to only those workers who average more than 40 hours per week is overly restrictive. It is certainly possible that there are workers who SOMETIMES work more than 40 hours who would benefit from additional overtime pay.

    2. Your argument about the expected decline in hours is absurd. For a typical 40-hour per week worker, a 0.2% decline amounts to less than FIVE MINUTES of lost hours. This amounts to a loss between $0.56 and $1.21 per week, depending on the person’s wage. This money would be more than recouped by working a single hour of overtime.

    3. Your argument about the expected decline in wages is also absurd. For the affected workers, a 0.9% decline amounts to a loss between $4.09 and $8.73 per week. Again, this loss is more than recouped by working a single hour of overtime.

    4. You say that this regulation will cost Florida small businesses $243 million per year. What you fail to mention is that Florida has 2.18 million small businesses, according to the state’s Small Business Administration. This amounts to an average loss of $111 per year or $2.14 per week. Few small businesses will “need to shut down” because of a weekly expense of $2.14.

    Beyond my objective critiques of your argument, I will offer an additional subjective critique. Businesses aren’t stupid; they are on a perpetual quest to profit-maximize. If paying workers extra money to work overtime isn’t profit-maximizing, then they won’t do it. To say that this overtime rule will cripple small businesses is a fallacy, because it ignores the fact that these businesses have complete flexibility in hiring and scheduling. If paying a worker more money is too rich for their blood, they aren’t forced to schedule a worker for overtime. It’s as simple as that.

    Again, I appreciate looking at new regulations with a critical eye, but this analysis is one-sided and misleading. I hope that you will consider a more diverse set of opinions in your next blog post.

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