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Overtime Rule Is a Threat to Workers and Small Business

By statute, Congress delegated to the Secretary of Labor “the authority to define and delimit the terms of the [overtime] exemptions.” But that doesn’t mean it is good policy to dramatically modify the exemptions.

On June 30, 2015, the Department of Labor submitted a notice of proposed rulemaking to significantly modify the exemptions in the Fair Labor Standards Act’s overtime rules. Most notably, the proposed rule greatly increases the minimum salary threshold for exempt workers.

Currently, under the FLSA, overtime regulations require time-and-a-half pay for every hour above 40 that an hourly employee works in week. Workers may be exempt from overtime pay if they are salaried employees who perform executive, administrative, professional, and outside sales activities and make more than $23,660. The exemption targeted by the DOL’s proposed rule is the salary exemption threshold. The agency plans on raising the threshold 113 percent from $23,660 to $50,440.

Currently, the DOL is reviewing hundreds of thousands of comments and plans on finalizing the rule in the summer of 2016

DOL officials claim that the proposed rule is intended to give workers a raise. Yet, a number of unintended consequences will arise if the rule is finalized and has little chance of giving workers a sizeable pay increase.

There is no doubt that the DOL rule change will increase the amount of employees eligible for overtime (estimated at 5 million workers), but unlike increases in the minimum wage, the government cannot force employers to pay employees more via the overtime rule, because employers can take steps to keep labor costs at relatively the same level, either by degrading salaried employees to hourly, hiring fewer employees, reducing base pay, or cutting back hours.

And these choices employers will have to make to keep labor costs constant will have a detrimental impact of the prospects of employees. For example, demoting junior managers to hourly workers may have devastating impact on those workers’ career trajectories. Once on a management track and gaining supervisory skills, now they are performing more basic tasks with less opportunity for advancement.

Another negative consequence comes from demoting low-level mangers—the loss of flexible schedules. As a salaried manager, if a child becomes sick or an emergency arises during work hours a manger is able to leave work to address the problem without loss of pay. An hourly employee loses that pay when absent from work.

Like workers, small business is in the crosshairs of the rule change. As reported on Market Watch:

An official at the U.S. Small Businesses Administration said the Department of Labor underestimated what its new overtime rules would cost small businesses.

“There are a lot of unintended consequences,” said Janis Reyes, assistant chief counsel at the Small Businesses Administration’s advocacy office.

Small business owners may have to increase managers’ salaries, hire and train new part-time employees, and lower rent, among other changes, to avoid overtime costs, she said.

In addition, salaried employees could lose benefits such as health care by being forced to transition to hourly employee status, she said.

The DOL’s one-size-fits-all change to the minimum salary threshold also fails to take into account the vast difference in cost of living around the country. For example, in New York City the increase may not be devastating, but it could drive a small business owner in rural Arkansas out of business or result in layoffs.

Everyone can get behind the idea of helping workers who are struggling to get by. However, the proposed overtime rule does more harm than good, if any good at all. Imposing greater costs on businesses results in cuts somewhere, often by reducing wages or creating less jobs. As my colleague Wayne Crews often notes, “You don’t have to tell the grass to grow—you just need to take the rocks off of the grass.” The time has come for us to take the rocks off of the U.S. economy.