Three Ways Obama’s New Overtime Rule Hurts the Economy and Workers

Three Ways Obama’s New Overtime Rule Hurts the Economy and Workers


Most bad policies harm the economy in one identifiable way.  But the Labor Department’s new overtime rule, released on May 18, harms the economy and the American worker in three different ways.

The new rule requires employers to pay white-collar workers overtime if they earn less than $47,476 annually, instead of less than $23,660, the case at present. (Manual workers generally have to be paid overtime at all earnings levels.) The effect will be (1) to raise costs to employers, discouraging employment; (2) to prohibit flexible time for employees; and (3) to stunt American productivity and economic growth. 

Related: Obama Moves Toward Executive Action on Overtime Pay

Consider Rob, an analyst at a consulting firm, who earns a salary of $45,000 a year. Now if he works late one night he can come in later the following day, or take extra time off. He can duck out of the office to attend his child’s kindergarten concert.  He can come home for dinner and catch up with his work in the evenings.

With the Labor Department’s new overtime rule, effective December 1, this will change.  Along with others who make under $47,476 annually, Rob will have to keep track of his hours by clocking in and out. Because of the need to track hours, telecommuting will be difficult.  If he works longer one week then his employer will not be legally allowed to give him “comp time” (time off instead of the extra hours), but will have to pay him overtime instead. 

Not that Rob will necessarily earn more than what he is making now. Either Rob’s employer will make sure he never works more than 40 hours in a week, or his rate of base pay will be lowered to make up for the extra hours worked. 

The Labor Department’s new salary test means only that Rob is “protected” with the right to time-and-a-half pay rate for any hours worked over 40 per week, but he never works over 40 hours, it is an empty benefit.  Most workers affected never get the chance to work over 40 hours per week. The administration estimates that about 4.2 million workers would qualify for overtime in 2017.

Related: Why Obama's Overtime Boost May Not Make It to Your Paycheck

The administration touts the overtime rule as a device to raise the incomes of workers, but their own analysis calculates only $1.2 billion annual increase in wages of affected workers.  The real effect of the rule will be to add significant administrative costs. 

One cost is familiarization, the initial time and effort that each employer must expend to understand the requirements and assess what needs to be done. 

A second cost is the initial wage classification adjustment costs. Firms need to identify each employee affected by the higher salary test, to decide for each case whether to raise their salary to the new threshold or to convert the status to non-exempt hourly. In the case of conversions, there will be further effort to determine what base hourly rate to establish and what usual hours requirement and policies to set for assignment and approval of overtime hours. 

A third cost is management costs.  Workers converted from salaried to hourly status will require additional management supervision time for checking time records and for approval of overtime hours.  

The administrative costs of the new rule could total $18.9 billion the first year – over 15 times greater than the $1.2 billion of increased wages that the administration estimates will be received by workers. In subsequent years, the ongoing management supervision costs imposed by the rule could total around $3.4 billion each year, almost three times the $1.2 billion of wage gains generated. 

Related: U.S. extends overtime pay to 4.2 million salaried workers

In an article in the Huffington Post, National Institutes for Health Director Francis Collins and Labor Secretary Thomas Perez write that the overtime rule will improve pay for the 38,000 junior scientists who are critical to biomedical research. NIH plans to raise its salaries above the $47,476 threshold to enable scientists to continue to put in long hours without having to pay overtime. At the same time, Collins and Perez admit that other “research institutions that employ postdocs will need to readjust the salaries they pay to postdocs that are supported through other means, including other types of NIH research grants.”

While NIH might raise salaries, there is nothing in the law that prevents the other labs from reducing the scientists’ rate of base pay, and giving them the same paycheck.  Unless science labs get more funding, the labs will either reduce base pay, reduce hours, or both to meet the new requirement. Even the most advanced labs cannot manufacture dollars out of nowhere.

The fundamental problem in science is not lack of overtime protection, but that the United States undervalues science research. Science pays far less than law, business, or finance, and so the brightest American minds are going to other fields. Perhaps Collins can fix that problem by raising funds and awareness.

Most of the workers who will be affected by the new overtime rule will see no increase in their paychecks.  Their only benefit will be to know that they will not be required to work more than 40 hours in a week without getting overtime pay.  Instead of extra pay, most will lose the schedule flexibility, prestige, and career opportunities that they now enjoy as salaried workers.