There is no such thing as a free lunch – or a free raise. But federal regulators tend to disregard this simple truth. Such is the case with the costly overtime pay rule put out by the Department of Labor.
On December 1, 2016, the overtime rule will dramatically hike the salary threshold for overtime eligibility for salaried employees, from the current $23,660 to $47,476, an unprecedented increase. Although the Obama administration touts the rule as a way to increase workers’ wages, it won’t work out that way in the real world. The new government mandate presents a huge cost increase for employers across America, many of whom will have no other choice but to make some hard cutbacks. It will have an especially devastating impacts on non-profits, universities, and small businesses.
House Republicans have offered a brief reprieve. On September 28, the House passed Representative Tim Walberg’s (R-Mich.) bill called the Regulatory Relief for Small Businesses, Schools, and Nonprofits Act, and the bill even garnered some support from Democrats. The legislation would delay the overtime from going into effect for six months. Senator Jeremy Lankford (R-Okla.) recently introduced a companion bill in the Senate, and it deserves a vote.
Delay is essential because the Labor Department did not give enough time for employers to comply. The DOL finalized the rule on May 18, 2016 and set the effective date on December 1, 2016 – less than seven months for employers to figure out how to comply with it.
Compliance will be a real challenge, because the rule is both costly and cumbersome. The DOL estimates in the just the first year that employers will face $677 million in direct compliance costs. On top of the direct costs, the DOL predicts that the regulation will add 2.5 million paperwork hours on the regulated community.
It takes time to prepare to deal with such high costs and mountains of paperwork. There are a number of questions an employer must answer to comply with the rule and continue to run a successful organization.
For example, the employer must go on a fact finding mission. They need to know how many employees are no longer exempt from the overtime rule. Then, they need to start tracking those employees’ hours, previously unnecessary for salaried employees exempt under the old rule. Once this is done, a decision needs to be made on whether to demote the employee to hourly status, raise wages over the new threshold, or pay overtime at their current salary. Or, instead of changing wages, employers could trim benefits—reduce employer premium contributions to healthcare plans, stop matching 401(k) funds, or reduce other benefits like paid time off.
Big businesses may not be in as much of a bind, because they have counsel and HR professionals on staff to guide them through compliance. But labor regulators did not take seriously the concerns expressed by small businesses, non-profits and universities that do not have staff needed to achieve compliance or the means to deal with additional costs. Consider the comments sent to regulators from these sectors.
In comments to the DOL, the Office of Advocacy in the Small Business Administration stated that the DOL analysis did not take the potential hardships of small business to heart and failed to “inform the public about the impact of this rule on small entities.”
Non-profits, too, will run into difficulties fulfilling their goals due to the added expenses. A representative for Operation Smile—an international charity that provides medical surgeries for children with cleft lips, cleft palates, and other facial deformities—said that the rule “will increase our payroll cost by nearly $1 million annually affecting over 50 percent of our workforce.” In real terms, that means Operation Smile would provide “nearly 4,200 fewer surgeries …globally each year.”
Numerous universities have expressed concerns with taking on the additional expenditures. Iowa officials state that, in the first year, universities and government will incur costs of $19.1 million. The University of Tennessee stands to incur $9.5 million in additional costs from the government wage mandate.
Congress should step in to overturn the misguided rule. Short of that, Congress and the President should, at minimum, seriously consider Rep. Walberg’s compromise to postpone the rule’s implementation and give small businesses, non-profits and universities more time to prepare for this crushing burden.
Trey Kovacs is a policy analyst for the Competitive Enterprise Institute in Washington, D.C.