New Government Rules for Overtime or More Government Overreach?

Posted on July 1, 2015 by Kathy Hoekstra

The new proposed rules to increase eligibility for overtime by raising the wage exemption floor could have far-reaching, unintended consequences that hurt more workers than they help.

Even the most well-intended government rules and regulations can have far more negative effects than positive ones.

The proposed new federal rules for overtime pay are no exception.

Announced last year with details unveiled this week, these rules would adjust the Fair Labor Standards Act to make more workers eligible for overtime pay – from $455 a week ($23,660/year or less) to $970 a week ($47,892/year). The change would reportedly affect five million workers, or less than four percent of the nation’s 149 million member workforce.

While Americans deserve to be fairly compensated for their hard work, it’s important to understand how this rule impacts businesses and employees, especially lower profit margin companies such as grocery stores and restaurants.

The Wall Street Journal cited a White Castle Vice President and JCN member Jamie Richardson on how the new rules would impact his company, already hit hard by new health care rules and bracing for mandated minimum wage increases:

“White Castle System Inc., a hamburger chain with about 400 general managers who earn annual salaries of $45,000 to $54,000 and don’t qualify for overtime pay, had estimated it would cost the company between $8 million and $12 million a year to compensate the managers for the overtime they work, said Jamie Richardson.”

And as Washburn University Law School Professor Joseph P. Mastrosimone writes in the Huffington Post,  “while the rule would make more employees eligible for overtime pay, it might result in workers being worse off than before.”

By worse off, he means employers will be forced to figure out how to pay some employees more, with the same revenue stream. Here are some options employers may consider (abridged for length):

  1. Reduce an employee’s salary so overtime plus regular wages equals the same as before: “For example, imagine a store manager who is paid a $500 weekly salary and who regularly works 50 hours a week, 10 hours of which considered overtime hours. Under the new rules, that manager would be entitled to overtime and would, if the employer did not adjust salary, earn an additional $50 per week. Magic! But, not so fast. By reducing the manager’s salary to $450 per week, the manager under the new rules earns only $495 per week after overtime is calculated.”
  2. Convert salaried workers to hourly workers: Using the previous example, by converting the store manager to an hourly employee and setting her hourly rate at $9.10 per hour, the employer would pay $500.50 for the same 50 hours of work: “As an hourly worker, she would now be punching a time clock and only be paid for hours she actually clocked. If she had to leave to run an errand or to pick a sick child up from school early, she would not be paid for that time. Not only that, she would lose the status usually associated with salaried work, as opposed to hourly work.”

Many employers would also have to crack down on workers’ job duties, thus reducing opportunities for comp or flex time, and as the Wall Street Journal points out, cause a bigger paperwork headache. Restaurant owners, for instance would have to carefully track when workers were “performing supervisory tasks, such as setting schedules, and when they were performing tasks typically handled by hourly workers, such as running a cash register.”

The National Retail Federation says expanding overtime rules would drive up payroll costs but would limit opportunities to move up into management.

All of this, says Mastrosimone, “would incentivize employers to take away the flexibility, stability, and notability that come from earning a guaranteed weekly salary and to replace it with the uncertainty of an hourly wage. And, that trade off could come with little or no additional take home pay for the employee.”

And hiring might become more difficult if it is more expensive. The federal health law already fines employers if they do not offer health insurance. A Marketwatch columnist suggested that businesses may start cutting back on hours of service, outsourcing to other countries or incorporating more technology to replace human labor. There’s no overtime requirement for automation.

These rules are being touted by politicians and others as a way to boost the middle class. Unfortunately, more government overreach is not the best avenue to achieve these noble goals. Allowing employers and employees to reach the terms of their own working arrangements – including hours and pay structure – ensures companies can pay within their means to stay in business and create jobs in the first place.