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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.
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.
Given the massive increase in the salary threshold, and automatic future increases as part of the proposal, most employers will have to make major changes to their workforces.
Employers may prevent cost increases by eliminating jobs, automating job functions and shifting more work onto remaining salaried employees.
Employers may reduce workers’ benefits, hours or base pay. Employers could keep compensation constant by reducing or eliminating benefits such as 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.
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.
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.
Workers could be pushed into underground employment and lose workplace protections. In Puerto Rico, for example, the rule proposes a huge increase in the overtime threshold that could encompass more than 90% of Puerto Rico’s formal workforce. With many workers there 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.
The economy at large also 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.
Greszler is a senior research fellow at the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.
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