Administration’s overtime regulations could be costly

Commentary

The Biden administration seeks to hike the threshold under which hourly wage work regulations apply by about $25,000 per year. The proposed overtime rule threatens to throw millions of workers out of their salaried jobs and into hourly work, leading to lost flexibility and autonomy, benefit and wage cuts, and job losses.

The Fair Labor Standards Act requires that hourly employees be paid 1.5 times their usual rate for any hours worked over 40 in a given week. Employees who receive regular salaries regardless of the hours they work typically are exempt from overtime requirements.

If the rule is finalized, employers who have salaried employees earning between the current threshold of $684 per week ($35,568 per year) and the proposed threshold of $1,158 per week ($60,209 per year) will have to decide whether they will convert them to hourly workers, trade salary increases for benefit cuts or eliminate their jobs. There are 12.3 million workers in this range.

Workers in lower-cost areas would face the greatest consequences. For example, while fewer than 50% of workers in the District of Columbia, Massachusetts and Washington state have earnings below the proposed threshold, more than 70% of workers in Arkansas, Mississippi, South Dakota and West Virginia have earnings below the proposed threshold.

The rule would require employers to make major changes to their workforces. Employers may prevent cost increases by eliminating jobs, automating job functions and shifting more work onto remaining salaried employees. A study of recent overtime rule changes in the U.S. found a 3-to-1 ratio of employment losses to income gains and an increase in inequality.

Employers may reduce workers’ benefits, hours or base pay. Employers could keep compensation constant by reducing or eliminating benefits like retirement contributions and paid time off. A study showed that employers have responded to forced wage increases by reducing workers’ hours enough that employers no longer have to provide them with health insurance. Or employers could do what IBM did in response to an overtime lawsuit settlement: reduce workers’ base pay by 15% while keeping total compensation unchanged.

Hourly employees get paid only for the hours they work. Where a salaried employee may take two hours off for a child’s doctor visit without any change in pay, an hourly worker would receive a smaller paycheck.

Legal liabilities make it difficult and risky for employers to allow hourly employees to have flexible schedules or to work remotely. Parents currently able to leave work an hour early to pick up kids from school and to finish up work at home could lose that option. Young workers who want to come in early or leave late to learn the ropes and make a good impression could be prohibited from doing so, and shift managers who want to trade Sunday for Monday shifts would no longer have that option because their employer would have to pay them each time-and-ahalf.

This regulation would cause the economy at large to suffer. A Congressional Budget Office study of a similar proposed overtime increase found its benefits were far less than its costs. Overall, it would raise prices for consumers, lower family incomes and reduce employment.

Instead of imposing costly regulations in an attempt to force employers to pay higher wages for the same work, policymakers should seek to help workers produce and earn more while keeping doors open to flexible work opportunities.

Rachel Greszler is a senior research fellow at the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.