Last week, Speaker Paul Ryan (R-Wisc.) called out recent Department of Labor policies as having a “chilling effect” on the economy. Ryan’s statements were in response to an anemic rise in the country’s gross domestic product of only 0.5 percent in the advanced first quarter estimates.
Of note, Speaker Ryan mentioned two DOL policies, the overtime rule and joint employer guidance, which pose a threat to economic growth.
The DOL’s proposed overtime rule dramatically expands overtime pay eligibility to millions of salaried employees (5 million by DOL estimates and 12.5-13.5 by Employment Policy Institute analysis) by raising the salary threshold exemption from $23,000 to around $50,000 (recently Politico reported the DOL is considering a $47,000 threshold down from the proposed $54,000).
Instead of focusing on the core functions of a firm, small to midsize companies may have to hire additional human resource personnel, contract out the task, or seek legal services. The extra help will be necessary to figure out how to comply with the new rule and figure out how to soften the financial blow as much as possible.
Mercatus Center research finds that tech startups could incur a one-time cost of $317 million to $4.5 billion in legal fees to comply with the proposed rules. The National Retail Federation estimates it would cost retailers and restaurants $745 million to comply with the rule.
The Department of Labor projects “1.2 million would receive a wage hike [from the proposed overtime rule]… and the rest would see a reduction in the number of hours they’re required to work.”
Normally, wages rise due to increased productivity from greater capital investment in the tools of workers or innovation of some sort. The 1.2 million workers in line for a raise did not magically become more productive because of the government mandate.
Since it makes littles sense to pay overtime to employees without an increase in productivity, the DOL predicts the other 4.8 million workers could see a reduction in their workhours. Workers may see more than their hours reduced. Many salaried employees could also be degraded to hourly status, which harms their long-term earnings potential and career trajectory.
The DOL’s joint employer guidance likely diminishes productivity, as well. Under the policy, more employers will become jointly responsible for Fair Labor Standards Act violations—minimum wage, overtime, or other violations—of another employer they contract with.
One of the primary strategies management implements to increase productivity has been to outsource non-core functions of a company to contractors (e.g., janitorial services, security, and receptionists), allowing companies to focus on their core competencies. By making employers that outsource responsible for the wage violations of contractors, the rule may force companies to reconsider whether outsourcing non-core functions still results in operational cost savings and higher productivity.
Aside from degrading productivity, jobs are at risk. Outsourcing has created jobs and provided opportunity to many entrepreneurs. Another detriment of the DOL’s stringent joint employer standard is the near certain increase in employer liability insurance premiums, which are normally based on how many workers a company employs. These could greatly increase if employers’ workforces start to include contractors.
Thankfully, Speaker Ryan realizes the grave threats of the DOL’s action. And as Speaker, Ryan must certainly realize that Congress possesses the power of the purse, and should use it to prohibit the DOL’s harmful regulatory actions.