The Trump Administration’s Overtime Protection Rule

In March of 2019, the Department of Labor issued a proposed rule to update and extended eligibility for overtime pay for employees that do not perform managerial, executive, or administrative taks. The proposed rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, mandates that all salaried employees making more than $35,308 per year and performing certain tasks are exempt from overtime pay requirements. The current overtime eligibility rule, implemented in 2004, sets the salary exemption level at $23,660 per year, meaning only 13% of workers are granted overtime protection.[1] The Trump Administration’s rule updates this salary threshold to match the increased cost of living, extending overtime protection to 1.2 million new workers.[2] However, the Trump Administration’s rule has been criticized by liberal think tanks and policy makers for not sufficiently raising the salary threshold, leaving low skilled workers vulnerable to predatory management practices.[3]

In contrast, the Obama Administration’s overtime rule, proposed in 2016, would have covered an additional 4 million workers by raising the salary threshold to $47,476 per.[4] The Obama rule also included yearly automatic updates to the salary threshold to match inflation, resulting in an expected salary threshold of $51,000/year by 2020.[5] The Obama Administration felt this threshold was sufficiently high to stop the managerial loophole where employers delegated a few managerial tasks to low skilled workers so they would be exempt from overtime pay while still not being given a proper managerial salary. However, a federal judge struck down the 2016 rule before its implementation, citing that the Department of Labor had exceeded its authority in creating the rule, as the high salary threshold had made exemption status primarily based on salary and not on job duties (contrary to the mandate of the Fair Labor Standards Act)[6]. As a result, many managers, with hiring and firing power, would have been classified as hourly employees. Further, despite good intentions, the high salary threshold created perverse incentives for employers to cut hours, reduce benefits, and increase part time employment, resulting in fewer good paying, full-time jobs and advancement opportunities for workers. Conversely, the Trump Administration’s rule returns to the methodology historically used by the Department of Labor and offers proper overtime protection for eligible workers without placing too great a regulatory burden on small business. The proposed rule is expected to be implemented in the coming days. 

Methodology

As part of FDR’s New Deal, Congress passed the Fair Labor Standards Act in 1938 (FLSA), establishing landmark worker protection including the 40-hour work week and time and a half pay. The law included exemptions from overtime pay for salaried, white collared workers performing administrative, executive, or professional duties. These jobs are exempt from overtime pay as they are compensated with a sufficient salary, entail strong bargaining power, and often require greater flexibility in work hours. Under the FLSA, Congress directed the Department of Labor to use a duties test to determine exemption status for workers.[7]

 In 1958, DOL instituted a salary threshold to act as a proxy for duties to screen out obviously nonexempt employees (as workers making below the salary threshold were likely not in managerial positions).[8] Following standard methodology, the DOL set the minimum salary required for exemption at the 10th percentile of employee wages in the lowest wage-earning region in the lowest wage industry. The DOL then combined this salary threshold with a strict exempt duties test to determine eligibility. Employees making less than this salary threshold received overtime protection while employees making over this threshold still had to pass a duties test to demonstrate they held administrative, managerial, or executive roles. In tandem, DOL also used a higher salary threshold with a shorter duties test. In this case, employers had to demonstrate employees were responsible for many administrative, managerial, or executive duties to be exempt despite making below the salary threshold. DOL then calculated the salary threshold using the data from both tests through a process known as the Kantor Method, fulfilling the requirements of the FLSA.[9] If the Kantor Method had been used to establish the 2016 rule, the salary threshold would have been $34,167 per year, $15,000 lower than the salary threshold set under the Obama rule[10].

In 2004, DOL decided to standardize the overtime exemption process by using one salary test and one duties test. To do this, the DOL tweaked the historical methodology, setting the salary threshold at the lowest 20th percentile of employee wages in the lowest wage-earning industry of the lowest wage region[11]. The percentile was increased to account for a slight decrease in the length of the duties test. Unlike the historical methodology that paired a high salary threshold with a short duties test or a low salary threshold with a long duties test, the new methodology set a middle ground for both tests. If the 2004 methodology had been used during the 2016 rule, the salary threshold would have been $30,004/year, $17,000 lower than the actual 2016 salary threshold[12].

In 2016 the Obama Administration departed with both methodologies and determined the salary threshold by using the 40th percentile of all non-hourly paid employees from various wage-earning areas including high wage-earning communities like Virginia and D.C[13]. The Obama Administration paired this extremely high threshold with a strong duties test, meaning that it was difficult for employers to exempt workers that made less than the salary threshold even if they generally performed administrative or executive functions. This effectively replaced the duties test with an artificially inflated salary threshold due to the use of high wage-earning areas, in direct conflict with the requirements of the FLSA. As a result of this flawed methodology and the resulting legal challenges, the Trump Administration returned to the 2004 methodology in determining the exemption threshold. The proposed rule also does not contain any changes to the standard duties test[14].

Exorbitant Costs, Little Rewards

            While the Obama Administration Rule would have extended overtime protection to over 4 million additional workers, it would not have substantially raised wages due to perverse incentives for employers. A working paper by the Mercatus Center found that since paying workers overtime is costly, workers would have experienced minimal increases in wages as employers would have 1.) limited employee hours to limit overtime pay or 2.) lowered base wages for those employees that would have necessarily had to work overtime, resulting in little positive wage growth for employees.[15]

Under the Obama rule, DOL predicted a wage increase of $1.2 billion to eligible workers.[16] While this seems like a large increase, it is significantly offset by the numerous costs associated with implementing the rule including classification adjustment costs, managerial costs, and familiarization costs. Supervision costs alone, including monitoring employee hours and job duties, were estimated at $3.3 billion over 10 years with annually recurring costs of $338.6 million.[17] With employers bearing the burden of these costs, employers would have turned full time jobs into part time jobs, further cut job hours for full time workers, and lowered base wages to make up for the cost incurred by compliance and paying overtime rates.

The Congressional Budget estimated that companies would have passed these high compliance costs onto consumers, resulting in real family income declining by $1.3 billion per year[18]. Further, while the Obama Administration’s rule proposed to expand overtime protection to 4.2 million workers, in actuality workers would only see tiny increases in weekly earnings. According to the DOL, workers that did not regularly work overtime would have seen their average weekly earnings increase by $5.48 while workers who regularly worked overtime would have seen an additional $20 per week[19]. With such meager increases at such a high cost, it is clear the Obama Administration’s rule offered little benefit to workers at the expense of large regulatory burdens on employers.

In contrast, the Trump Administration rule estimates compliance costs of $1.2 billion over 10 years with annual recurring costs of $120.5 million[20]. With a significantly less burdensome cost to employers, the DOL estimated that yearly wages for affected workers would increase by $492.4 million annually[21].  While this is only half of the projected annual wage increase under the Obama rule, average increases in weekly earnings are close to the Obama rule. The American Action Forum found that workers who do not regularly receive overtime are estimated to receive a weekly wage increase of $4.54, while employees who regularly work overtime are estimated to see an average weekly wage increase of $17.98[22]. Therefore, while these wage increases are similarly minimal, they come at a fraction of the cost to employers and consumers as under the Obama rule.

Further, the Trump Administration rule allows traditionally exempt employees to keep the greater flexibility and other benefits associated with salaried jobs. As hourly workers are forced to track their hours, they have limited flexibility in their weekly work schedule. This places a greater strain on work/home life balance as employees can no longer take an afternoon off to go to their child’s sports game or to the doctor’s office without a reduction in weekly pay. In contrast, salaried employees enjoy the flexibility to make these decisions as they can work remotely and during non-traditional work hours. Such flexibility also provides important opportunities for advancement as employees have the freedom to put in extra time to impress their boss. Hourly employees face a much harder time gaining advancement opportunities as they are strictly limited in the hours they can work and are often restricted from putting in extra time if they wanted to. Reclassifying millions of salaried workers into hourly workers would have resulted in small weekly wage increases at the expense of flexibility and other benefits associated with salaried jobs. However, the Trump Administration’s rule allocates increased wages, keeps flexibility and opportunities for advancement and simultaneously reduces the compliance burden on employers and consumers.[23]

Other Improvements over the Obama Rule

In addition to regulatory and legal challenges, the Obama Administration’s rule also included dismal attempts to circumvent bureaucratic and federalism inefficiencies. Firstly, the Obama Administration’s rule included automatic increases so that the salary threshold would update yearly to keep pace with inflation. While this would certainly have prevented another 14 year lapse in rulemaking it did so at a dangerous cost. The US economy has changed drastically in the past several decades from a manufacturing economy to a service economy and it is likely that with the fast pace of technological innovation, this economic transformation will continue. Furthermore, with continued trade wars, rapid changes in the stock market, and the erratic behavior of President Trump, a future economic downturn would not be surprising, affecting the rate of inflation and wages. As a result, creating automatic updates and banking on continued economic growth would be unwise, ignoring the lessons of the past as well as the clear dangers of the current economic moment. Therefore, to protect employers and the general wellbeing of the U.S. economy, the Trump Administration’s rule avoids automatic updates. Instead of simply ignoring bureaucratic inefficiencies, the Administration’s rule holds agencies to account by requiring agencies to uphold their mandates and annually continue rulemaking. Requiring agencies to do their jobs should not be an insane idea, but simply the normal functioning of the federal government.

Similarly, over-legislating on the federal level limits the ability of states to pass their own laws that are more applicable to states’ needs. The Obama Administration’s rule set a salary exemption threshold that was significantly higher than thresholds set on the individual states level. The Obama Administration salary threshold was $16,000 higher than the salary exemption level set by the state of New York and $9,000 higher than the salary threshold set by California.[24] As two of the most progressive and affluent states in the country, California and New York often promulgate legislation and regulations that are far more stringent than federal laws and rules, demonstrating the Obama Administration’s extremity in its overtime rule. The stark difference between the Obama salary threshold and the thresholds set by liberal states show the large regulatory overreach of the Obama Administration’s rule and the negative impact it would have had on companies and employers in low income areas around the country.

Conclusion

            By comparing the Trump and Obama Administration’s proposed rule it is evident that the Obama Administration’s rule offered meager wage increases to workers at significant added costs to employers, job advancements, and job flexibility. Further, the Obama Administration’s proposed rule added a significant regulatory burden to employers, especially small businesses in low wage-earning areas. In contrast, the Trump Administration’s rule offers overtime protection and wage increases to an additional 1 million workers at a third of the regulatory costs of the Obama Administration’s rule. Further, The Trump Administration’s rule protected worker flexibility and advancement opportunities while calling on the DOL and state governments to continue to promulgate legislation and regulations that supports workers in an economically sound way.

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[1] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 04514 (2019)

[2] Ibid.

[3] Ibid.

[4] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 1754 (2016)

[5] Ibid.

[6] Wiessner, Daniel. “U.S. Judge Strikes down Obama Administration Overtime Pay Rule.” Reuters, 31 Aug. 2017.

[7] The Fair Labor Standards Act of 1938, 29 U.S.C. 201

[8] Mayer, Gerald, Benjamin Collins, and David H. Bradley. “The Fair Labor Standards Act (FLSA): An Overview.” (2013).

[9] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 04514 (2019)

[10] McCutchen , Tammy D. “Compliance HR.” Compliance HR, Compliance HR, 14 Oct. 2015.

[11] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 04514 (2019)

[12] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 1754 (2016)

[13]Ibid.

[14] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 04514 (2019)

[15] Boudreaux, Donald J., and Liya Palagashvili. “An Economic Analysis of Overtime Pay Regulations.” SSRN Electronic Journal, 6 Apr. 2016, doi:10.2139/ssrn.3191407

[16] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 1754 (2016)

[17]Ibid.

[18] The Economic Effects of Canceling Scheduled Changes to Overtime Regulations,” Congressional Budget Office, November 14, 2016

[19] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 1754 (2016)

[20] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. 29 CFR 541§ 04514 (2019)

[21] Ibid.

[22] Gitis, Ben, and Dan Goldbeck. “DOL’s 2019 Proposed Overtime Pay Rule.” American Action Forum, American Action Forum , 28 Mar. 2019.

[23] Boudreaux, Donald J., and Liya Palagashvili. “An Economic Analysis of Overtime Pay Regulations.” SSRN Electronic Journal, 6 Apr. 2016, doi:10.2139/ssrn.3191407.

[24] McCutchen , Tammy D. “Compliance HR.” Compliance HR, Compliance HR, 14 Oct. 2015.