The House Committee on Education and the Workforce, chaired by Rep. John Kline (R-Minn.), held a hearing on June 9 to examine the Labor Department’s controversial overtime rule, which among other things raises the weekly salary threshold below which overtime must be paid from $455 to $913 a week, or stated annually, from $23,660 to $47,476 a year. The Committee Majority has expressed concerns that the administration has failed to streamline existing overtime regulations and has finalized a rule that will lead to fewer jobs, less workplace flexibility, and fewer opportunities to climb the economic ladder. But one witness, whose testimony was not featured by the lawmakers in their press release, saw the rule much differently, notably as a vehicle for rolling back the trend of rising income equality that has been underscored by decades of stagnant wages for middle-class workers.
It’s worth remembering that the proposed rule would have set a higher threshold of $970 a week or $50,440 annually, but it was reduced in the final rule. In addition, the proposed rule set this salary threshold at the 40th percentile of full-time salaried workers nationally, but the final rule sets it at the 40th percentile of full-time salaries in the lowest-wage Census Region, which is currently the South. This change was in response to concerns that the “one-size-fits-all” approach of the proposed rule did not take into account the lower salaries paid in some areas of the country, particularly in the South.
Negative impact on workers
The testimony highlighted by the Committee Majority underscored the perceived downside of the final overtime rule. Tina Sharby, chief human resources officer at Easter Seals New Hampshire, testifying on behalf of the Society for Human Resource Management (SHRM), said: “Easter Seals New Hampshire will need to reclassify 280 employees from salaried to nonexempt status … limiting career opportunities and reducing flexible work schedules that both attract our staff and enable us to provide certain services … The final rule will impact employees on a personal level … Many staff members have expressed feelings of being demoted.”
Michael Rounds, associate vice president for Human Resources Management at the University of Kansas, said: “A primary concern is that our centers will not be able to afford as many postdocs and will need to cut back on the number of research openings and opportunities that are available. A decrease in the number of postdocs may have a direct impact on the standing of the University of Kansas in the national higher education research community.”
SHRM’s advocate also pointed to concerns about how the overtime rule will impact services to vulnerable populations, such as veterans and children with disabilities. “A program at significant risk is the Military and Veterans Services Coordination program,” she observed. “Services are provided around the clock to respond to emergency situations for our veterans and their families … Because of the potential cost for overtime, Easter Seals New Hampshire will be forced to limit the number of coverage hours for this already underfunded program, limiting our ability to provide around-the-clock care and lessening these lifesaving support services.” The Special Education School that provides services to over 80 children, will also be impacted, according to Sharby, who said “Easter Seals simply cannot afford to pay overtime and the children with disabilities that we serve are the ones who will suffer the most.”
Implications for students
Rounds also expressed concern about the impact of the final rule on students: “It is inevitable that there will be a significant reduction in the services currently being provided by the University of Kansas units to students as we transition employees from their current exempt to non-exempt status without the flexibility of working more than 40 hours per week regardless of mission demands.”
“It is probable … that tuition will ultimately be pushed higher in future years in order to address the enduring impacts of the new overtime rule,” according to Rounds. “There is simply no way for universities like the University of Kansas to absorb costs of this magnitude without an impact on our academic, research, and outreach missions that will be felt by the public we serve.”
Sharby observed that the final rule will not only directly impact the budgets of nonprofits, but also small businesses. “These employers will be unable to absorb such a massive increase in payroll and labor costs,” she predicted.
“Regulatory familiarization, adjustment, and managerial costs will be significant for all employers,” Passantino suggested. “Perversely, however, these costs may be more significant for those organizations that can least afford it, such as small businesses … These organizations have the least discretion in their budgets and, in many ways, they will need to be the most creative in developing solutions.”
What about the good news for workers?
One witness, however, looking in a different direction with his observations, voiced the upside of the impact of the new requirements on workers and their families. “I predict that this overtime rule change, implemented by the Obama administration and its Labor Department and broadly supported by congressional Democrats and the general public—60 percent of Americans backed the proposal in a recent poll, will come to be viewed as an important and positive intervention on behalf of middle-class families,” said Dr. Jared Bernstein, Senior Fellow, Center on Budget and Policy Priorities.
Income inequity up in face of eroding wage standards
Berstein observed that salary threshold in the FLSA regulations “was ignored for decades, other than a notch up in 2004.” He said that the new increase, although historically large, does not even bring the threshold back up to its historical peaks, but rather only partially restores its inflation-adjusted historical value.
In contrast, Berstein pointed to data showing the percent of national income going to the top 1 percent of households, which for decades hovered around 10 percent, at the same time that the FLSA overtime threshold “was regularly maintained at a real level of at or above $1,000 in today’s dollars.” Beginning in the 1980s, as inequality trends began to push up income concentration, Bernstein said labor standards like overtime and the minimum wage were permitted to erode.
Economic impact and worker well-being
Bernstein pointed to the DOL’s estimates that the new requirements will cost employers $1.5 billion a year ($1.2 billion in new overtime pay and $300 million in administrative expenses to implement the change), which amounts to about 0.03 percent of the United States’ $8 trillion total national wage bill. He noted also that “Goldman Sachs’ analysts found that “the new rules should have little effect on wages in the aggregate, “arguing that the rule change is likely to raise average hourly earnings less than 0.1 percent.”
“This tiny impact on the aggregate wage bill should not undermine our expectations that the rule will improve the well-being of millions of workers and push back to some degree on inequality,” Bernstein urged. “First, some of the higher pay for beneficiaries of the new rule will come from redistribution within the wage bill (from high- to middle- and lower-paid workers). Second, in cases where workers are no longer tapped to work unpaid overtime hours, they are clearly better off in terms of balancing work and family life. Though such a welfare-enhancing change does not show up in the national accounts, it is one of the very important benefits of the new rule.”
Policy win for middle-class families
Bernstein predicted that over time, as the new overtime rule takes effect, it will be recognized as a major policy win for middle-class families. “It will boost some paychecks, help parents balance work and family, and produce new straight-time jobs,” he said.
Moreover, the fact that the threshold will be automatically adjusted will militate against the deteriorating trends of rising income inequity and eroding wage standards, which will remind policymakers that “labor standards must be vigilantly maintained, protected, and updated,” according to Bernstein.
Seeing the big picture
“I’ve urged members of this committee to ignore knee-jerk antipathy to the new rule and instead to deal in substance, as the [Labor Department] did in reviews of tens of thousands of comments and listening carefully to stakeholders on all sides of this issue,” Bernstein pressed. “We see the results of such compromise in the use of the lowest regional threshold, the three-year deferral for certain non-profits, and the leaving of the duties test unchanged.”
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