This week, the Biden Department of Labor announced that it would resurrect Obama-era regulations on overtime pay.

The new rules would allow salaried workers earning less than $55,000 annually to automatically earn time-and-a-half pay if they work in excess of 40 hours in a week. 

While this move is positioned as a pay increase for workers, it will massively increase costs for businesses and may not deliver the widespread paycheck bump advocates believe that it will.

What’s happening

Under the Fair Labor Standards Act (FLSA), hourly workers who log over 40 hours each week must receive overtime pay at a rate of at least one and a half times their regular pay. The FLSA exempts many employees from overtime, such as executives, managers, professionals, and salespeople. 

Over the past decade, the salary threshold has been raised by both Democratic and Republican presidents.

President Barack Obama sought to nearly double the threshold from $23,660 per year to $47,476, but his rule was blocked by a federal judge from taking effect in 2016. In 2019, President Donald Trump raised the overtime threshold to $35,568.

The Biden proposal would be a 55% increase from the current level set by his predecessor and is expected to affect 3.6 million people. Industries with large concentrations of women such as fast food, retail, and other lower-income jobs would likely be affected. 

Not so fast on the celebrations

When the Obama Administration’s threshold increase was finalized, the Department of Labor estimated that overtime would be expanded to 4.2 million workers. However, according to an analysis by the American Action Forum, average weekly earnings among those workers would have only grown by $5.48 because only 825,000 of those workers regularly worked more than 40 hours per week.

In addition, the regulatory costs on businesses would be crippling. The DOL estimated that the rule would have imposed $304.3 million in annual compliance costs and 2.5 million hours of paperwork.

There’s another angle to consider: how employer would respond to the increased costs. Advocates of overtime pay increases don’t assume or consider that employers would make choices to reduce the burdens that increased labor costs would impose on them. 

As I wrote in a policy focus, employers could implement a number of changes that would not be beneficial to workers:

  • Reclassification of non-exempt employees to exempt
  • Lower base pay
  • Offer fewer benefits
  • Offer fewer hours or more tightly control how many hours are worked
  • Shift workers to part-time jobs
  • Automate jobs
  • Remove responsibilities from enterprising workers
  • Reduce flexibility

Bottom Line

Given stubbornly high inflation, it’s understandable to want to find ways to increase income for workers, but this may have unintended consequences that backfire against workers in reducing flexibility and opportunities for growth.