Federal judge invalidates overtime rule that threatened millions of workers, employers

OPINION:

Employers and workers may not realize it, but they just dodged a bullet.

They can thank a federal judge in Texas who just tossed out a Biden administration rule that tried to raise the salary threshold for overtime pay by 65%, from $35,568 to $58,656 per year (a range that includes about 12 million workers). That new threshold would have exceeded the earnings of more than 70% of workers in lower-cost states such as Arkansas, Mississippi, South Dakota and West Virginia.

The same thing happened in 2017, when a federal judge in Texas tossed out a virtually identical overtime rule from the Obama administration. In each case, the court ruled that the Department of Labor overstepped its authority by violating Congress’ intent for overtime exemptions to be based on workers’ duties — not just their salaries.

This is an obvious relief for employers, which were facing the prospect of having to increase millions of workers’ pay by as much as 65%.

It’s a less obvious relief for workers and consumers. That’s because, despite the Biden administration’s promotion of the rule as raising pay fpr millions of workers, the rule’s costly mandates would have unleashed a host of unintended consequences.

The overtime salary threshold is the minimum amount employers must pay their salaried employees for them to be exempt from overtime rules. Overtime rules require employers to pay workers 1.5 times their usual pay for any hours over 40 that they work in a week. (Employees must also, first and foremost, meet a duties test — performing sufficiently self-directed work — to be considered exempt from overtime pay.)

The Department of Labor estimated that its rule — which was established in April and went into effect with a partial increase in the threshold to $43,888 on July 1 — would affect over 4 million workers, either increasing their base salaries or providing added overtime pay.

But businesses aren’t bottomless money pits. Just as a family facing a 65% increase in their rent or mortgage would have to make significant changes in their spending, employers facing large payroll cost increases were preparing for significant changes to their operations.

The most obvious change would be for employers to raise their prices to cover higher payroll costs. But with inflation having significantly squeezed families’ budgets, employers may have avoided price increases by eliminating jobs, automating job functions and shifting more work to salaried employees. A study of recent changes to overtime rules in the U.S. found a 3-to-1 ratio of employment losses to income gains and an increase in inequality.

Another unintended consequence of more mandated overtime would be employers keeping total compensation costs constant by reducing workers’ hours or eliminating workplace benefits such as health insurance or retirement contributions.

And many employers would have responded to the rule by converting millions of workers from salaried employees into hourly employees. That could have resulted in smaller, less consistent paychecks because workers’ hours often vary from week to week, and whereas a salaried employee would still receive a full paycheck in cases of having to leave early to pick up a sick child, an hourly employee would get a smaller paycheck.

Moreover, hourly employees often lack the autonomy and flexibility of salaried employees because complying with overtime laws requires that employers closely track and restrict workers’ hours. 

That usually means prohibiting remote work — which can’t be easily tracked — and prohibiting autonomy, like choosing to come in early or leave late, and prohibiting co-workers from switching shifts because that could require overtime pay.

While invalidating this rule prevents a host of unintended consequences, it doesn’t solve two problems: Workers’ pay has failed to keep pace with inflation in recent years, and government policies are imposing barriers to work and rising wages.

Instead of costly new regulations, policymakers should allow new apprenticeship programs to begin, allow successful welfare-to-workforce programs to expand and allow workers to choose the type of work that works best for them.

_______

Rachel Greszler is a senior research fellow in workforce and public finance at the Roe Institute for Economic Policy Studies at The Heritage Foundation.