Although it is almost 80 years old, the Fair Labor Standards Act remains central to the American labor market. One of its mandates requires employers to pay certain classes of employees time-and-a-half for every hour worked beyond 40 in a week. While numerous exceptions from the overtime mandate exist, the Department of Labor recently proposed to drastically alter the “executive, administrative, or professional” (EAP) exemption. Under the current rules, salaried employees must earn at least $455 a week to qualify for the EAP exemption. In the name of ensuring workers are not “overworked” and “underpaid,” the DOL’s proposal more than doubles the earnings threshold to $970 a week.
“If the Department of Labor is concerned about an underpayment or overworking problem, it should aim at addressing public policies that increase labor market competition and labor mobility.”
DOL claims its proposal encourages additional hiring, improves employee well-being, and leads to higher paychecks. President Obama has called it a raise for middle-class families. However, a number of economists are critical of the proposal. One of these critics is SUNY Purchase economics professor Liya Palagashvili, who is the coauthor of the recent Mercatus Center working paper An Economic Analysis of Overtime Pay Regulations. In what follows, Palagashvili explains why the DOL overtime proposal attempts to solve a nonexistent problem and threatens the modern workplace .
Jared Meyer: The central component of DOL’s proposal is an update to the EAP exemption, which would remove the exemption from an estimated five million workers by setting the threshold at a proposed annual salary of $50,440, up from today’s level of $23,660. What problem is the DOL trying to solve with this proposal?
Liya Palagashvili: The DOL gives us two official goals of this proposal: To “spread employment” and to increase worker health. There is another goal that is going around in the media, which is to raise employees’ wages. The idea with the first two official goals is that current employees will be expensive to hire after they have worked 40 hours a week, so employers will hire other workers—hence “spreading employment.” If employers are hiring other workers and not making their current employees work more than 40 hours a week, then they are helping to “increase worker health.” The third unofficial goal is that employees will see their wages increase because employers will have to pay them time-and-a-half. The problem that the DOL is trying to solve is an underpayment or overworking issue. Basically, there are some employees who are working over 40 hours a week, but are exempt from the overtime pay regulations. The regulation seeks to help them.
JM: A large portion of your paper is dedicated to exploring how the DOL dramatically underestimated the unintended consequences that its proposal will place on the very workers it is trying to help. If implemented, what will happen to employees?
LP: We find strong empirical evidence that employers will cut base salaries in response to the new regulation. For example, if you are a marketing associate making $40,000 a year, and your employer now has to track your hours and pay overtime, then one response by employers is to cut your salary down to, for example, $33,000, to offset the anticipated cost of paying overtime.
It is unfortunate that the DOL is not honest about this implication of its regulation, as the department only focused on the potential positive aspects. Employers can also respond with eliminating that junior role of marketing associate and hiring another employee at a senior role, such as a marketing coordinator, who can justify be paid above the $50,440 threshold. The last thing that a regulation should do is eliminate entry and junior role jobs—especially given the current problems that recent graduates are having finding jobs.
JM: Your research indicates that the American economy is very competitive and—contrary to popular belief—that Americans are not actually overworked or underpaid. What did DOL neglect to consider when constructing its proposal? Is the entire methodology flawed?
LP: The problem with the entirety of the DOL study supporting its proposal is that they do not present any evidence that there is a chronic underpayment (or overworking) problem for workers with salaries from $23,660 to potentially $50,440 across all industries in the United States. Also, this salary range only directly affects workers with low- to medium-level skills (since base salaries of most high-skilled workers are above the threshold).
The consensus in the economics literature is that the U.S. labor market, especially for low- to medium-skilled workers, is quite competitive. If the DOL wants to “solve” something, they first have to identify what the problem is that it wants to solve. The department has yet to do so.
JM: Your paper discusses the effect of this regulation on tech startups. Why will this promising industry be one of the hardest hit by the DOL overtime regulation?
LP: One other major issue is that the DOL does not provide an analysis of how this regulation will affect the diversity of industries in the United States. Specifically, the department does not tell us how the overtime regulations will change our most dynamic sector, the tech startup industry.
Putting aside expensive software engineers, startups have many roles in marketing, operations, finance, and customer service that would fall in this salary range. The problem is that startups do not have a strong revenue stream. Their margins are very small, and that is one of the reasons they pay employees in equity instead of cash wages.
Furthermore, any adjustment to comply with this law will come at a high price. Most small startups do not have in-house counsel; the lawyers who work with start-ups typically charge between $350 and $800 per hour, and legal costs for noncomplex matters (such as payroll and worker classification) are about $5,000 a year. For a company that is trying to get off the ground and battling the hurdles presented by constant fundraising, this is a real dent in the wallet.
Furthermore, unlike assembly line jobs, there are complexities surrounding what it means to be “working” at a startup. Does checking work email on the weekend count as work? Should employees clock their hours if they are researching marketing strategies one evening? Do lunch meetings count? These questions and many more remain. Major aspects of the overtime regulation are premised on a traditional view of what it means to work and on a traditional view of compensation structure. But these factors are not easily applicable to the 21st century—in particular, to tech startups.
JM: Is there a threshold level of “underpayment” and/or “overworking” that would make DOL intervention legitimate, or even necessary? Furthermore, if this were an issue, could government effectively address it?
“Moving many entry-level workers to hourly pay will harm startups and make it even more difficult for young workers to put in the extra work required to move up the career ladder.”
LP: I am not sure how one would go about measuring underpayment and overworking in today’s economy. As an academic, sometimes I work seven days a week, nonstop, to finish writing a research paper. Does that mean I am overworked or underpaid because I worked more than 40 hours this week? The reality is that we are now becoming an information economy, and in many jobs it no longer makes sense to pay by the hour.
Hourly pay is quickly becoming an outdated model for many professions . Hourly pay grew in popularity during the 20th century industrial and manufacturing age. Someone clocks into their shift, they are working during that time, and then they clock out and leave. Contrast this with the nature of the jobs in academia. It would be absurd to pay academics “by the hour.” In an information economy, which is where we are headed, more and more jobs fit the work model of academia rather than the by-the-hour model of traditional manufacturing. And because of this, we have seen the rise of telecommuting (working from home). Employers allow their employees to work from home because they are not after tracking that they must put in their “eight hours a day.”
Even if you could measure the extent of an “underpayment” or “overworking” problem, the best thing that government could do is remove the barriers of entry into labor markets in order to make them more competitive. There are government policies in place today that make it more difficult for workers to exit current jobs and enter new jobs.
If the Department of Labor is concerned about an underpayment or overworking problem, it should aim at addressing public policies that increase labor market competition and labor mobility. Policies in place that tie workers to particular jobs make these workers dependent on that job, and this dependency allows for potential abuse of employees. For example, policies such as occupational licensing create barriers of entry into different jobs, and harm labor market mobility.
JM: The Department of Labor’s proposed changes to the EAP exemption levels are unprecedented in their scale of increase (113 percent). These regulations are also another unfortunate instance of regulators fabricating solutions to non-existent problems in the name of worker protection—only to hurt many of the very workers that they seek to protect. Moving many entry-level workers to hourly pay will harm startups and make it even more difficult for young workers to put in the extra work required to move up the career ladder.
This piece originally appeared at Forbes
This piece originally appeared in Forbes