Background: In March 2014, President Obama directed the Department of Labor (DOL) to significantly reform overtime regulations affecting salary exempt employees under the Fair Labor Standards Act (FLSA). The FLSA requires most employers to pay their hourly employees one and a half times their usual pay for time worked above 40 hours a week. The current overtime rule also requires most employers to pay their salary exempt employees making under $23,660 a year one and a half times their usual pay for time worked above 40 hours a week.
In July 2015, President Obama’s DOL proposed raising the overtime rule salary threshold to $50,440 a year, a 110% increase. This would force employers to pay overtime rates to all salaried workers who earn less than $50,440 a year – effectively turning 5 million workers into hourly employees. Finalized this summer, the DOL’s new overtime rule raises the threshold to $47,476 (a 100% increase) and effects 4 million workers. The overtime rule will raise labor costs and restrict the growth of businesses, particularly small businesses employing a high number of hourly and seasonal workers operating in the restaurant, retail, and manufacturing industries.
Lower Base Wages & Potential Layoffs: While the current administration argues increasing the overtime threshold will raise worker wages, economic research shows the opposite will occur. In order to cover the cost of the new overtime rule, employers will most likely reduce the base wages of their workers or move them to hourly nonexempt employees and prohibit overtime. For many small businesses, the new overtime rule may be so costly that they will be forced to lay off employees or simply stop growing their business altogether.
Reduced Workplace Flexibility: Moving 4 million salary workers into hourly employees will greatly reduce workplace flexibility. Many employees salaried in the $30,000-$50,000 range are managers and supervisors working at small businesses. They are given the opportunity to work flexible hours or telecommute, and some have employee-sponsored health insurance. Moving these workers to hourly employees will take away this flexibility and some could even lose health insurance if reduced to part-time work.
Increased Compliance Cost: An additional consequence of moving salary employees to hourly workers is increased compliance cost. Every time an overtime-eligible employee answers a work e-mail, takes a phone call, or does additional work from home, the employee must track and pay them for it. This increases compliance costs and opens up the door for law suits. Trial lawyers filed over 8,000 FLSA lawsuits in 2013, many of them for employers who did not compensate overtime-eligible employees for work done remotely.
Solution: The DOL’s new overtime rule will harm the workers it claims to help. Instead of raising earnings, the new overtime rule will reduce base pay, reduce worker flexibility, increase business compliance cost, and restrict business expansion and employment opportunity. Congress should prevent the DOL from implementing its new overtime rule by passing H.R. 4773 – Protecting Workplace Advancement and Opportunity Act.