An Increased Burden: Too Expensive and Less Work

As part of a flurry of new rules and regulations coming from the Obama administration, the Department of Labor’s recently announced Overtime Pay Regulation intends to benefit salaried employees with annual salaries of $23,000-$50,440 by increasing the number of individuals eligible for overtime pay as a result of the Fair Labor Standards Act (FLSA). Approximately 5 million EAP (Executive, Administrative or Professional) employees previously were exempt from the FSLA overtime pay requirements; but now, as a result of the new overtime rule, these employees are eligible for paid time-and-a-half for every hour over 40 hours per week. The Department of Labor established three policy objectives for the new regulation: spread employment, improve worker health and well-being, and increase wages for employees. When applied in the workforce, however, the overtime rule fails to achieve these policy objectives.

These regulations rest on the assertion that there is a systemic problem of overwork and underpayment of EAP workers, a claim that the Department of Labor fails to provide sufficient evidence to support. U.S. labor markets promote an environment in which labor contracts result from mutually beneficial competitive bargains between employers and employees. These agreements are a product of competitive free market forces, which will be obscured as a result of the enactment of the overtime regulations.

With the implementation of the overtime regulations, employers will respond to the new rules in unintended ways. The cost of employing EAP employees for the same amount of work they currently do will rise, causing employers to adapt by cutting base pay, reducing the number of employees and shifting pre-tax compensation, such as healthcare or retirement benefits, to taxable compensation. This means that employers will get — “less bang for their buck,” — resulting in lower productivity and efficiency per person, a costly economic tradeoff. The Department of Labor provides no conclusive evidence that job opportunities will grow, rather, those whom the overtime rules affect potentially face unemployment or will likely pick up a second part-time job to account for decreased base wages.

Many salaried jobs not suited for hourly pay, such as those in tech start-ups, now have the potential to transform into hourly waged positions due to the new overtime rules, even though not all jobs benefit from hourly wages. Tech start-ups, one of the sectors most affected by the regulations, could face problems due to their reliance on lower salaries in conjunction with equity in the company.

In a study of the new overtime rules by the Mercatus Center at George Mason University, economists estimated compliance costs for tech start-ups hover around $3.7 million. These companies remain in a delicate state and the overtime rule inhibits flexibility and business opportunities. This distortion of the labor market proves problematic because the innovation resulting from flexibility is essential to promoting growth, progress and prosperity.

Tech companies are not the only sector that could potentially see harm as a result of this new rule. Industries that employ or rely on compensation methods such as bonuses, commissions or profit sharing, should also expect to feel a strong impact.

These regulations will also make doing business in any industry much more expensive. A study by the American Action Forum concluded that the new overtime rule would cost employers about $3 billion in compliance costs and nearly 2.5 million hours of paperwork related to the regulations. Other negative impacts include the potential elimination or diminishing of company incentives, such as bonuses. Research  shows that employee productivity improves when tied to incentives.  Increased compliance costs, valuable time spent on paperwork and a decrease in employee incentives stifles business formation, development and economic growth. With fewer options to offer employees, both employees and employer are likely to see less economic opportunity.

The overtime regulations will not achieve the policy objectives laid out by the Department of Labor, rather, the rules will likely negatively impact EAP employees.  A number of studies indicate adverse effects for employees, such as reduced hours, a growing number of employees taking on moonlighting jobs, decreased diversity of labor contracts and less flexible work environments like telecommuting. While not perfect, the current labor market remains competitive and provides opportunities for both employers and employees to benefit.

While the intentions of this rule are noble, the unforeseen implications hold the potential to cause great economic harm. A lack of evidence for the central “problem” the rule is meant to address, the inability to achieve the three policy objectives Department of Labor established, in conjunction with the negative consequences of reducing base pay or number of employees, all contribute to the need to stop the implementation of these regulations and allow the market to function.  Overall, the Department of Labor’s overtime regulations are too expensive, will likely lead to less employment and increase the burden on employers and in turn, employees who have negotiated for their current compensation package.