Jul 08, 2016 - 10:15am

The Overtime Rule’s Cold, Hard Reality

Senior Editor, Digital Content

Winter is coming” for employers and employees December 1st when the Labor Department’s new overtime rule comes into effect.

Employers are preparing for the new change, while employees who will be shifted from salaried to hourly workers should brace for new ways of working.

Tammy McCutchen, a labor attorney at Littler and a former administrator of the wage and hour division at the Labor Department under President George W. Bush, briefed small business owners at America’s Small Business Summit in June. McCutchen oversaw the last update of the overtime rule in 2004.

In May the Labor Department finalized regulations making salaried workers earning less than $47,476 per year ($913 weekly) to be eligible for overtime if they work more than 40 hours a week.  

The administration doubled the threshold from $23,660 ($455 weekly), making more people eligible for overtime in order to “make work pay.” President Obama touts that the rule will “boost wages for working Americans by $12 billion over the next 10 years.”

Interestingly. the theory behind the Great Depression overtime law wasn’t about raising incomes like the president argues today. Instead, its purpose was to nudge employers to not pay overtime, but rather hire more hourly workers and reduce unemployment.

As for the new overtime rule, it’s true that some workers will see more in their paychecks—especially if their current salary is close to the $47,476 threshold--but the vast majority of overtime eligible workers won’t see a pay boost. 

"Unless you have a secret pile of cash somewhere, you're probably not going to be able to pay your employees more,” McCutchen said.

A Shock to Workers

Employers will rationally respond by closely tracking the hours of newly overtime-eligible workers. As a result, employees will see a dramatic change in how they work.

Millions of workers will be reclassified from salary to hourly and will have to punch a time card or fill out a time sheet to track how much work they do. Even if they continue to be paid on a salary basis, if they are paid less than $47,476, they will have to track their hours to determine if they worked over 40 in any week. 

"Employees that have never had to touch a time clock now have to touch a time clock," McCutchen said.

Not tracking hours opens employers up for lawsuits from enterprising plaintiff lawyers. Quartz reports that federal wage and hours cases have doubled in the last ten years, and between 2007 and 2015 a majority of those suits involved overtime. Already, law firms are planning advertising campaigns to drum up new business from the rule change.

While communications technology allows us to do more work away from the office, overtime-eligible workers will now need to track the amount of time spent answering off-hour emails on their smartphones or doing work at home. This new reality frustrated an owner of a real estate business who noted at the briefing that her managers often email and text subordinates afterhours "to remind them to pick up something." "How are we going to quantify that? That will require so much documentation," she lamented.

“All of that is paid time,” McCutchen answered.  “You have to be able to track and pay the now non-exempt overtime-eligible employees for every single email they do at home, for all the telephone calls they make at home, for every time they open their laptop at home, for every time they travel for work other than their normal commute.”

McCutchen called this the “hidden cost of reclassification.”

A Shock to Workplaces

The overtime rule will also upend corporate cultures. A manager from a local California chamber of commerce said at the briefing, "We're struggling with this. We're going to have to reclassify half our staff to go to non-exempt. It's a really emotional thing for them."

For-profit companies won’t be the only ones affected. The overtime rule covers all employers. Schools, local governments, charities, and other non-profit organizations that provide critical public services will have to cut back their services because of the overtime rule, because they don’t have the ability to generate more revenue by raising prices.

The overtime rule illustrates the growing gulf between what regulators devise at DOL headquarters in Washington, D.C., and how their policies play out in the real world. Instead, as Marc Freedman, Executive Director of Labor Law Policy at the U.S. Chamber wrote:

The DOL ignored the pleas by employers from all sectors—small businesses, nonprofit, public, education, and others—to back off the rulemaking and conduct a legitimate economic analysis that would show the real impact the regulation will have on employers and employees.

Employers will have to reconfigure how they pay their employees—not for sound business reasons like attracting and retaining workers or improving their operations—but to meet the schemes of DOL "experts" who don’t grasp what millions of employers and employees do on a daily basis.

Sure, it may be the dog days of summer now, but December 1st will come fast. By then both employers and employees will be dealing with a new, cold reality.

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About the Author

About the Author

Sean Hackbarth
Senior Editor, Digital Content

Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.