The Many Unintended Consequences Of Obama's New Overtime Rules

Expect lower base salaries and less flexibility

This week or next, the Department of Labor will release new proposed rules on overtime pay. Those rules will fulfill President Obama's 2014 promise to raise the salary level at which employers are required to pay overtime.

In an interview with the Huffington Post in March, the president said: “What we've seen is, increasingly, companies skirting basic overtime laws, calling somebody a manager when they're stocking groceries and getting paid $30,000 a year. Those folks are being cheated.”

But the new rules will hurt all workers, especially working parents and working women, who have always valued job flexibility. In response to the new rules, employers may lower base wages, so people who do not get overtime will be paid less. Employers could also offshore some jobs; raise prices to consumers; substitute technology for workers; reduce economic activity on weekends and evenings; or some combination of the above.

Firms already pay more to employees for more time worked through variable compensation packages. They have to pay someone more to work a 60-hour-a-week salaried job than a 35-hour-a-week job. Under the Fair Labor Standards Act, employees who are eligible for overtime have no guaranteed monthly or annual salary. If they are paid only for the hours they actually work, they suffer a loss of income every time they need to leave work early to care for a sick child or attend a school sporting event.

Under the Fair Labor Standards Act, hourly workers cannot receive comp time — time off in exchange for extra hours worked. If they work Saturdays and Sundays, they have to be paid overtime — they cannot take Monday and Tuesday off in exchange. Since employers will be required to keep careful track of workers' hours to avoid being sued for overtime violations, they might be unwilling to allow them to telecommute, a valued option for many workers.

Currently, any salaried worker making less than $455 per week, or $23,660 a year, has to receive overtime pay. This level was established under Department of Labor regulations in 2004. Under the proposed rule, which will likely have a 90-day comment period after its publication in the Federal Register, the Department will raise that amount, probably to around $965 per week, or about $50,000 a year.

According to calculations performed on Current Population Survey data by my Manhattan Institute colleague Scott Winship, 52 million people, or 35% of the workforce, earned between $24,000 to $50,000 in 2013. Depending on the structure and wording of the new rules, employers would have to pay overtime to some of those individuals.

Of those 52 million earners, 17.7 million had children living with them. It is surprising that President Obama would support such a change because the White House has stated repeatedly that flexibility is important, especially for women.

The home page of the White House Council on Women and Girls contains sections on workplace flexibility, complete with a kit to get started with workplace flexibility in individual communities. The site says: “Flexible workplace arrangements can mean flexibility in terms of when one works, where one works, or how much one works. Flexibility can play a key role in creating effective workplaces and in providing important benefits to employers, employees and the greater community.” Raising the mandatory overtime ceiling would take away those workers' flexibility.

Another group that values flexibility is millennials, those born between 1980 and 2000. In 2013, 18.4 million millennials earned between $24,000 and $50,000, according to Winship, and might be affected by the new rules.

One 25-year old millennial, who has since moved to a job that not only gives comp time but does not track vacation, told me: “In my first job, the fact that my bosses were being more careful about overtime was annoying because we had to get overtime approved in advance and they would never approve it. We never got paid more but we always ended up doing more work. I only got 13 vacation days so I would rather have had an extra afternoon off than extra money. I was getting paid so little anyway.”

In addition to making life harder for parents and millennials, raising the wage at which employees have to be paid overtime makes hiring workers more difficult. Already this administration has added to the cost of hiring with the Affordable Care Act, which fines employers if they do not offer health insurance. To avoid penalties, firms can stay below 50 workers and hire part-time workers for fewer than 30 hours weekly. Predictably, job creation since the recovery has been weak. Now the administration wants to add an extra burden of required overtime pay.

The results of increasing the overtime pay ceiling are also predictable. Bureau of Labor Statistics economist Anthony Barkume showed that employers lower base pay if they have to pay overtime. The employees who would be affected are all making more than minimum wage, so there is scope to hold wage levels down. Jared Bernstein, former chief economist to Vice President Joe Biden, concluded that there would be no job losses because employers would just reduce wages in reaction to the rule. Employees have to work overtime to stay even with their previous earnings, because their base pay is lower.

Furthermore, technology can increasingly substitute for workers. Those new robots aren't included in the proposed rule, and won't have to be paid overtime. Some jobs can be outsourced to other countries with less onerous rules. These days, new costs will be passed on to consumers, who will have less to spend on other goods and services. Some businesses may find it is not worth providing services at times that would trigger the new rules. Customers will not receive the benefit of services, and workers will not receive the benefit of employment.

Some people may prefer overtime pay, but others may prefer more leisure. The choice of comp time instead of overtime pay is a valued perk that is available to upper-income earners, making their lives easier. It should also be available to lower-paid employees. Those who designed the Fair Labor Standards Act in 1938 could not foresee the Internet, with its possibilities of telecommuting, the movement of women into the workforce, and the desirability of flexible work schedules

The 114th Congress should exercise its power and overrule the Labor Department's new proposed rule through legislation. Employers and employees should have the power to make the decisions that suit them. Workers in 2015 should not be bound by regulations stemming from the archaic Fair Labor Standards Act from before World War II.

Efforts to use the broad powers of the federal government to help employees often have the exact opposite effect. The free flow of entrepreneurial activity usually benefits workers more than the heavy hand of government.

This piece originally appeared in the WSJ's MarketWatch

This piece originally appeared in WSJ's MarketWatch