The True Losers of the Overtime Rule: Small Businesses

On June 23, 2016, the House Small Business Committee held a hearing over the Department of Labor’s new overtime regulation. The tone of the hearing was set in the opening remarks when Committee Chairman Steve Chabot (R-Ohio) wanted “to assure the small employers here today, and those tuning in from across this great country, that while DOL didn’t listen to you, we are.”

The overtime rule more than doubles the salary threshold—an increase from $23,660 to $47,476—that is now required to pay overtime rates when salaried employees work more than forty hours a week. This may seem like a positive regulation that puts more money in American workers’ pockets, however, the economic implications are likely to have devastating impact on many American workers, small businesses, non-profits and universities.  

But there was one witness in support of the overtime rule, Ross Eisenbrey, vice president of the Economic Policy Institute. Although the Obama administration pegs direct costs to employers at hundreds of millions annually with slightly over a billion in indirect costs, Eisenbrey didn’t find that to be much a problem. He acknowledged the money has to come from somewhere and “where it will come is from the owners of the businesses.” He cites the increase of executive pay compared to that of the working class yet ignores that a majority of businesses are small organizations that have tight budgets and few employees, yet this change in regulation could mean layoffs or even the end of the venture.

But most CEO salaries are not as generous as Mr. Eisenbrey purports. In 2015, the Bureau of Labor Statistics data shows the average CEO only earned $185,850 annually. In comparison, the mean earnings for all occupations is $48,320 annually.

While progressives use growing income inequality as a regular talking point, it is greatly overblown. As a Reason article contends, “The Middle Class Is Shrinking! Because They’re Getting Rich!”:

It is true that Pew's analysis shows that the number of households that fit within their categorization of middle class has shrunk by 11 percentage points since 1971. It is true that the proportion of households that are classified as lower class has increased from 25 percent to 29 percent. But it is also true that the proportion of households that are classified as upper class has increased from 14 percent to 21 percent.

That is to say, part of the reason that the middle class is disappearing is that they are succeeding and jumping to the next bracket. And a greater number of them are moving up than moving down.

Recent research from James Sherk, research fellow at the Heritage Foundation, shows worker earnings are growing alongside productivity, “[S]ince 1973, employee productivity has grown 81 percent; average compensation has increased 78 percent.” Sherk also finds that workers’ share of income has remained relatively constant for almost 70 years.

Mr. Eisenbrey also claims that growth and profits come from having customers and that is based on people having money, yet again he dismisses the reality that this overtime rule will stunt some businesses’ growth and harm more workers than it helps. In addition, CEI Policy Analyst Trey Kovacs points out, “giving workers a raise” is not a top DOL policy objective of the overtime rule.

Those who sign the front side of a paycheck were more skeptical of the overtime rule. Startup founder of Hireology, Adam Robinson, said at the hearing, “When I started my company in 2010, I can tell you with 100% certainty that I would have not been able to hire my first employee had this rule been in place.” He continued to explain the current status that his “company now has 100 employees with a median annual compensation that exceeds $70,000 a year – well above the US average.”

This rule can be the difference between a business never getting off the ground and growing to employ a large number of people at substantial rates.

While this rule may be well intentioned, hoping to put a couple extra dollars in workers’ pockets, removing regulatory burdens, which House Speaker Paul Ryan (R-Wisc.) proposes in a recent report, would alleviate costly administrative burdens that free resources that businesses can use to increase productivity. This is a better option if giving workers a better opportunity to succeed is the goal.