Judgment against overtime rule offers reprieve for small businesses

Last week, Texas U.S. District Judge Amos Mazzant issued a preliminary injunction against the Department of Labor’s overtime rule, which was scheduled to take effect on Dec. 1.

The decision amounts to a last minute stay of execution for thousands of businesses across the country that would have seen their post-Thanksgiving labor costs skyrocket because of the rule.

Though the ruling is officially only temporary, Judge Mazzant’s opinion suggests that it will become permanent, stating that “the Final Rule exceeds the Department’s authority.”

Exceeds indeed. The overtime rule would have doubled the salary threshold under which salaried employees are required to receive overtime pay for their hours worked beyond 40 in a week to $47,476. It would have also required the threshold to automatically increase based on an index to salary growth.

Judge Mazzant said that in issuing the rule, the Labor Department “exceeds its delegated authority and ignores Congress’s intent.” Congress, not a largely unaccountable and unelected Labor Department, should be tasked with making such a drastic change to labor law, implied the ruling.

Yet the Labor Department evidently felt that when it comes to overtime, the ends justify the means. It claimed that the rule would raise wages for 4.2 million Americans within the first year of implementation, and boost annual employee incomes by $1.2 billion.

But the Labor Department only reached this rosy conclusion by counting up the number of employees affected by the law without making any adjustments for the impacts on businesses. That would be like a small business making a decision based only on revenue projections while ignoring costs. Based on this logic, why not set the new standard at $75,000 or $100,000 so millions more employees would get a raise?

The answer of course is that such a regulation would devastate the business community. Anecdotal and economic evidence show the $47,500 threshold would also cause some low-margin, labor-intensive businesses to take offsetting measures like layoffs, fewer hours, and reduced benefits to account for the new costs.

Oxford economics concludes that the rule would have cost businesses $745 million. A study by the American Action Forum concludes that the wages of the 4.2 million affected workers are estimated to decline by 0.8 percent, while the number of working hours is expected to fall by 0.2 percent. “The money has got to come from somewhere,” Ron Peppe of Canam Steel told the Wall Street Journal. His company was holding off on hiring and restricting schedules to try to compensate for the rule’s increased costs.

But perhaps the biggest consequence of the rule would have been that it would have forced employers to reclassify their salaried employees as hourly ones to more easily and exactly track hours worked and avoid the 150 percent increase in marginal labor costs. The National Retail Federation estimates that 2.2 million retail and restaurant workers would have been affected by the regulation, one-third of whom would be converted from salaried employees to hourly workers.

The Labor Department even admitted as much when it was selling the rule, but claimed that reclassifications could be a good outcome because it would allow employees to “get that extra time back – which could go toward family time, the gym, classes or much more.” Tell that to the employee who has strived for years or decades to earn a salaried position and now is told that she has to go back to punching a clock – losing out on the flexibility, perks, prestige, and bonuses that come with being a salaried employee.

According to a national poll of small business owners commissioned by the Job Creators Network, over-regulation, of which the overtime rule is a prime example, is one of the biggest burdens facing employers. Three in five respondents said it was preventing them from expanding.

For them, the real turkeys this Thanksgiving are the unelected Labor Department bureaucrats who overreached with no appreciation for the impact on small businesses, nonprofits, and the people they employ. The Judiciary offered a reprieve this time around, but now it’s time for the incoming Congress to finally act to address these hurdles.

Alfredo Ortiz is president and CEO of the Job Creators Network.