States Challenge Obama Administration’s ‘Overtime Rule’

Published October 14, 2016

Attorneys general from 21 states are challenging a new regulation issued by the U.S. Department of Labor (DOL).

The regulation, known as the “overtime rule,” will affect about 4.2 million employees beginning in December. It mandates all salaried employees receiving less than $47,476 annually be paid higher wages for those hours worked once an employee has worked 40 hours in a week. Currently, DOL wage controls exempt salaried employees earning more than $23,660 annually.

Trey Kovacs, a policy analyst at the Competitive Enterprise Institute, says the rule will automatically expand to cover more and more employees.

According to Kovacs, as employers respond to the rule by reclassifying salaried employees as hourly employees, the formula used to set the threshold will cover increasingly higher-paid employees.

“The raise in the salary threshold is out of line with historical increases,” Kovacs said. “A consequence of raising the salary threshold so high and automatically increasing the threshold is that some employers will choose to demote salaried employees to hourly workers. Most likely, the employees that are reclassified as hourly would be employees earning lower salaries, so the pool of workers that determine the salary threshold earn higher incomes, which will make the salary threshold skyrocket in the future.”

Costly Burdens to Workers

Kovacs says the overtime rule will harm employers and employees.

“The overtime rule will directly cost employers over $600 million in compliance costs and add 2.5 million paperwork burden hours and an additional $1.3 billion in higher wages,” Kovacs said. “The money has to come from somewhere. One way some employers will try to make up these regulatory costs is by raising prices on consumers.”

James Sherk, a research fellow in labor and economics for The Heritage Foundation, says the regulation won’t do employees any good.

“Employers respond by reducing base salary,” to balance out the higher pay for overtime hours, Sherk said. “Employees could have slightly less pay, but on average the wages will be more or less exactly the same because the base salaries are going to adjust.”

Reducing Workplace Flexibility

Sherk says the overtime rule will reduce employers’ willingness to negotiate alternate working agreements, such as allowing employers to work from home.

“The real problem will be that employees must track their hours,” Sherk said. “Employers are more hesitant to make more-flexible work arrangements, because it’s more difficult to track someone’s hours when they are working from home. Employers are very hesitant to allow remote work opportunities for anyone covered by overtime laws.”