Damaging Effects of Overtime Rules (2015 Aug)

by Barry A. Liebling

Recently the Department of Labor – in response to a 2013 White House request – announced that beginning in 2016 the rules for overtime pay that apply to exempt employees will be changed. As of now, workers who make less than $23,000 per year must be paid time-and-a-half if they exceed a 40 hour workweek. The new regulation will extend the overtime mandate to a larger segment of employees- those who make less than $50,000 per year (many of whom are classified as professionals). http://www.wsj.com/articles/overtime-rules-send-bosses-scrambling-1437472801

The manifest rationale for the new federal policy is a familiar refrain. Put more money into the pockets of middle class Americans. Welfare state boosters have a long tradition of being generous with other people’s money – in this case business owners. But the latent motives are more sinister. By requiring that time-and-a-half pay rules be extended to more employees the government will bring about changes in the business landscape – changes that its apologists will describe as “unintended,” but savvy observers will recognize as deliberate.

Consider how this will affect the cost of doing business. According to The Wall Street Journal many businesses are already taking steps to comply with the new regulations. Firms are changing the status of employees who will be covered by the new rule. Salaried employees are being redefined as hourly workers to keep track of the time they put into the job and to discourage them from exceeding a 40 hour week. Note that if a company juggles it employees’ schedules, adjusts the workload, and requires them to do more in less time for the same pay the company’s expenses still go up. That is because putting in systems to track hours and comply with the law requires extra effort and extra money to pay for the effort. Apparently, consultants who specialize in helping companies with labor regulations are reaping a lot of lucrative engagements.

It is no accident that the new rule will affect large, successful companies differently from small or medium businesses. Big companies have extensive human resource functions in place and are staffed with professionals who are experienced at adjusting to ever-growing, more difficult, government requirements. But smaller companies and startups will find it challenging to do what is necessary to stay on the right side of the law. The new regulations are in some ways a gift to large, established firms because they create a higher barrier to entry for potential competitors. This result is parallel to what happened with the Dodd-Frank financial act of 2010 where complex financial regulations were an easily surmountable hurdle for the largest banks but were tremendously difficult for the small ones. Giant financial institutions were blessed as too big to fail while regional competitors were too small to succeed.

Think of how the new regulations will affect the relationship between employees and employers. On balance employees are likely to develop a lower opinion of their companies. There will be a higher potential for discord between the workers and the boss. And, it is hoped by the authors of the new rules, employees will regard the government as the agent that protects them from “exploitive business owners.”

Suppose the management of a firm does exactly what the meddling designers of the new regulations want. It continues to do business as usual, keeps track of hours, and pays employees a premium whenever they work more than 40 hours. When employees take home more money will they have warm feelings for the company? Probably not, because they know that the extra pay is the result of a government order – not the uncoerced decision of the firm’s owners. To an enthusiast of forced regulation this is the desired outcome – animosity (or at least indifference) to the “propertied class” and gratitude to the commissar who bosses the owner around.

Alternatively, what happens if management instructs its employees to avoid working overtime. It is likely that the employees will have to do more work in fewer hours to maintain productivity. How irritated will an employee be if she is urged to work harder (for the same pay) and feels more rushed than previously? Will the employee blame the “kind-hearted government” or her “dictatorial boss” for her discomfort? To what extent will employees that are told to hurry up and get things done more quickly be receptive to the appeals of a union organizer? Certainly, the architects at the Department of Labor have thought about this scenario and are counting on their “nudging” to pay off.

How should the Department of Labor formulate policy? Set aside the issue of whether the agency should exist. Deciding on pay rates ought to be a private matter between employees and employers. The department should restrict its directives to actions that prevent the use of force and fraud in the workplace. Using government coercion to “fix” how employees are paid is not animated by benign intentions and does not lead to acceptable outcomes.

*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***

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