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Rachel Greszler is a senior research fellow at the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.
The Biden administration is trying to hike the threshold under which hourly wage work regulations apply by about $25,000 per year. The proposed overtime rule threatens to throw millions of workers out of their salaried jobs and into hourly work, leading to lost flexibility and autonomy, benefit and wage cuts, and job losses.
The Fair Labor Standards Act requires that hourly employees be paid 1.5 times their usual rate for any hours worked over 40 in a given week. Employees who receive regular salaries regardless of the hours they work are exempt from overtime requirements so long as they pass a duties test and are paid a minimum salary level. (Certain occupations like teachers and lawyers are exempt altogether).
If the rule is finalized, employers who have salaried employees earning between the current threshold of $684 per week ($35,568 per year) and the proposed threshold of $1,158 per week ($60,209 per year) will have to decide whether they will convert them to hourly workers, trade salary increases for benefit cuts or eliminate their jobs. According to data from the Bureau of Labor Statistics, 12.3 million workers fall in this range.
Since the cost of living and wages varies significantly across the U.S. and the proposed overtime rule sets the same salary threshold throughout, workers in lower-cost areas would face the greatest consequences. For example, while fewer than 50 percent of workers in the District of Columbia, Massachusetts and Washington state have earnings below the proposed threshold, more than 70 percent of workers in Arkansas, Mississippi, South Dakota and West Virginia have earnings below the proposed threshold.
Given the massive increase in the salary threshold, and the fact that the proposal includes automatic future increases, most employers will have to make major changes to their workforces, including:
Workers may lose their jobs. Employers may prevent cost increases by eliminating jobs, automating job functions and shifting more work onto remaining salaried employees. A study of recent overtime rule changes in the U.S. found a three-to-one ratio of employment losses to income gains and an increase in inequality.
Employers may reduce workers’ benefits, hours or base pay. Employers could keep compensation constant by reducing or eliminating benefits like retirement contributions and paid time off. Moreover, a study showed that employers have responded to forced wage increases by reducing workers’ hours enough that employers no longer have to provide them with health insurance. Or employers could do what IBM did in response to an overtime lawsuit settlement: reduce workers’ base pay by 15 percent while keeping total compensation unchanged.
Many workers could experience smaller, less consistent paychecks. When workers are converted to hourly employees, they get paid only for the hours they work. Where a salaried employee may take two hours off for a child’s doctor visit without any change in pay, an hourly worker would receive a smaller paycheck.
Moreover, employers may maximize efficiency by altering work schedules. In California, an increase in the minimum wage left workers with fewer hours and significantly smaller paychecks. Employers also resorted to on-demand scheduling, changing workers’ start times and total hours.
A loss of flexibility and remote work options. Legal liabilities make it difficult and risky for employers to allow hourly employees to have flexible schedules or to work remotely. Consequently, parents currently able to leave work an hour early to pick up kids from school and to finish up work at home could lose that option. Young workers who want to come in early or leave late to learn the ropes and make a good impression could be prohibited from doing so, and shift managers who want to trade Sunday for Monday shifts would no longer have that option because their employer would have to pay them each time-and-a-half.
Workers could be pushed into underground employment and lose workplace protections. The rule proposes a 159 percent increase in the overtime threshold in Puerto Rico—a level that encompasses more than 90 percent of Puerto Rico’s formal workforce. With many workers in Puerto Rico already pushed into underground employment due to costly labor market regulations, the proposed regulation could cause many Puerto Rican workers to lose their formal jobs and the workplace protections that come with them.
In addition to the millions of workers adversely affected by this regulation, the economy at large would suffer. A Congressional Budget Office study of a similar proposed overtime increase found that its benefits were far less than its costs. Overall, it would raise prices for consumers, lower family incomes and reduce employment.
Instead of imposing costly new regulations in an attempt to force employers to pay higher wages for the same work, policymakers should enact policies that help workers produce and earn more while also keeping doors open to flexible work opportunities.
