The Obama Administration touts its new overtime rule as a quick and easy way to raise salaries, but many economists argue that it will instead add significant labor and administrative costs to the economy, possibly reducing employment and limiting workplace flexibility. Particular attention has been paid to the rule’s effect on colleges, which may incur millions in payroll costs.
“Paying overtime and meticulously tracking workers’ hours will burden employers with new costs, in dollars or time.”
I have sympathy for the extra burdens the Administration’s rule will place on higher education, but these established institutions will hardly be the biggest losers from the new regulation. To paraphrase Albus Dumbledore: do not pity the colleges, Harry, pity the startups.
Under current regulations, most workers who earn below $23,660 per year are eligible for overtime. In other words, employers must track hours carefully and pay their employees time-and-a-half if they exceed 40 hours in a given week. Broad exemptions from overtime requirements apply to salaried workers who earn above this threshold. The Labor Department’s latest move is to double that earnings threshold to $47,476 per year, making millions of workers newly eligible for overtime.
Paying overtime and meticulously tracking workers’ hours will burden employers with new costs, in dollars or time. That employers will need to make distortionary adjustments to comply with these requirements should be obvious. After all, regulation cannot generate higher salaries out of thin air—the money has to come from somewhere.
One might think that colleges, with their legions of adjunct professors and student employees, might be particularly susceptible to the new regulations. But as with any rule, there are exceptions. Some workers are exempt, meaning they are not entitled to overtime pay if they work for more than 40 hours in a week.
Most college professors—from tenured to adjunct—are exempt from the rule if they teach, along with administrators who manage a school’s academic functions. Undergraduate and graduate students employed as teachers, researchers, or resident assistants get an exemption too, since the Department considers their relationship with the college to be “educational” rather than outright “employment.” These exemptions have existed for some time, and the new rule does not touch them.
While these exemptions do not apply to most employees in the economy, a large number of employees on college payrolls fall into exempt categories. Using data from a National Center for Education Statistics report, I identified the share of college employees who fall into categories that are definitely exempt from the overtime rule, along with those who are possibly exempt. For example, instructors and graduate assistants fall into the “exempt” category, while other professors and administrators are “possibly exempt,” since their roles might have a large academic component that falls under the exemption.
Among all colleges, nearly 40% of employees fall into categories exempt from the rule. This share is even higher (57%) at public two-year colleges, which include community colleges. Public four-year colleges have a somewhat lower share of exempt workers (36%), but many of these schools have additional flexibility to offer their workers, who are considered government employees, comp time instead of overtime. (This option isn’t available to most workers in the private sector.)
None of this is to suggest that colleges will not face financial pressure from the overtime rule. Postdoctoral researchers are, controversially, not exempt from the rule and must start tracking their odd hours to be paid overtime. Neither are employees in nonacademic roles, such as maintenance workers, cafeteria staff, or guidance counselors. The regulations could force colleges to cut these workers’ hours, or simply hire fewer of them.
“Since universities and their business models have been around for centuries, these established institutions were able to secure exemptions from overtime rules for a sizeable chunk of their employees.”
But the new rule is unlikely to disproportionately harm colleges. If anything, higher education will be less affected by the regulations than other sectors, given the exemptions for professors and other academic staff. From a political economy perspective, the reasons for such carve-outs are clear. Professors’ work, which includes time away from the workplace grading papers and lesson planning, does not fit neatly into the clock-in-clock-out paradigm Congress had in mind when drafting the Fair Labor Standards Act of 1938. Since universities and their business models have been around for centuries, these established institutions were able to secure exemptions from overtime rules for a sizeable chunk of their employees.
Newer businesses have a similarly strong case for exemptions, but lack the political clout to secure them. As SUNY economics professor Liya Palagashvili explained in an interview with my colleague, Jared Meyer, many jobs at startups involve telecommuting or tasks outside of the office. “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,” she noted.
For instance, at home last night I read a Wall Street Journal article on the overtime rule. Does that count as work, since it informed research for this column? If so, then does any time I spend reading the news also count as work? If not, then would the time I spend at the office doing research for columns not count toward my weekly hours? A satisfactory answer to this question is impossible, which is why it makes more sense for my employer to pay me with a salary rather than by the hour.
Yet the Obama Administration insists on asking businesses to fit their information-economy employees into an hourly-pay framework. Colleges, with their established operating models, have already secured carve-outs for many employees for whom hourly pay is not appropriate.Startups, which do not yet have the political sway to lock down similar exemptions, must instead find a way to shoehorn their 2016 workforce into a 1938 labor law.
This piece originally appeared at Forbes
This piece originally appeared in Forbes