DOL’s new overtime rule comes with unintended consequences

by Dan Oswald

Last week, the U.S. Department of Labor (DOL) released a new rule that requires anyone who makes less than $47,476 to receive overtime pay. When a colleague suggested I consider this topic for my blog, I was reluctant. I’m not an expert on wage and hour issues. We have many people much more qualified than I to discuss the impact of the new rule. My second thought was that I don’t want to invite a DOL audit and all that comes with it. Yet here I am writing about it.

Here’s why: The same day the new rule was announced, I was standing before a large group of our employees at one of our locations. And as I looked out at the people who work so hard on behalf of our company, my thoughts went to those exempt employees who currently make a salary that is less than $47,476. How are they going to react when they are told they will have to punch a clock?

It is estimated that 4.2 million additional workers will now have to keep track of their hours. Some of those people work at our company. We will now have to communicate to those who fall below the new threshold that they will need to punch in and out every day. All the freedom they were allowed as an exempt employee will be taken away. Need to run an errand or leave for a doctor’s appointment? You now need to clock out. Sorry, but I don’t have any choice in the matter.

I know a business owner who faced this dilemma a number of years ago. Some of his technology people were paid on an hourly basis as nonexempt employees. He felt it was the right and fair thing to do since they were called on to work at odd hours when the company was facing technology difficulties and often worked more than 40 hours in a week. But the employees didn’t like being paid hourly—they wanted to be salaried. So this owner agreed to pay them a salary. He calculated their average pay, including the overtime pay they had received, and made them all salaried workers. The employees made the same amount of pay for the work they did. The company paid the same for the work it received. Everyone was happy.

Everyone, that is, except the auditor from the state’s wage and hour division. No, the auditor came in and said the technology employees still needed to be paid overtime because they were nonexempt employees. It didn’t matter that they had asked to be made salaried—they still didn’t meet the tests for exemption. (Even if a computer employee earns the currently required $455 per week, or $27.63 per hour, for exemption, the employee still needs to pass the duties test to be classified as exempt.) It didn’t matter that they were being paid an amount equal to what they received when they were paid overtime. The rules wouldn’t allow it because overtime must be calculated on a weekly basis. An estimated overtime amount can’t just be factored as part of an employee’s salary as this employer had done.

The business owner, for his good-faith effort to keep his employees happy, had to pay fines and back pay. And the overtime back pay was calculated at the hourly rate implied by their new, higher salary. The business owner’s good deed ended up costing him a pretty penny.

Many believe this new rule was politically driven in an election year, and there are some who claim it equates to a pay raise for many workers. However, the DOL itself says that one of the objectives of the new policy is to spread employment by “incentivizing employers to hire more employees rather than requiring existing employees to work longer hours.” That means it won’t raise wages for current employees but instead will cause employers to hire more workers to avoid paying overtime.

But when you’re moving salaried employees to hourly, you are limiting their ability to work anything beyond 40 hours without the employer having to pay overtime. My guess is that most employers, like me, will require employees to limit themselves to 40 hours a week so we don’t end up blowing our budget paying unexpected overtime.

When I was hired for my first professional job, my salary was $17,000. It was a long time ago, but even after taking inflation into account, my entry-level salary was far below the limit set by the DOL’s new rule. If I had been told that I had completed my college degree and earned my first professional job only to be paid by the hour, I would have been deflated. And if I had been told that I had to leave work after 40 hours, regardless of what I wanted, I would have been frustrated.

As I was trying to get my career off the ground, one of the ways I could distinguish myself from my coworkers was to produce more and higher-quality work. Doing so often requires outworking those around you. And it’s clearly an individual choice. If I wanted to put in the extra effort, it was my choice. I viewed it as an investment in my career. Today, I wouldn’t be allowed to do that unless my employer agreed to pay me overtime for the effort. The new overtime rule actually limits my freedom of choice.

I won’t question the motives of those who put the new rule in place. But the problem with any rule is that there are always unintended consequences. In this case:

1. The new rule takes away workers’ ability to determine their own career choices when it comes to how long and how hard they want to work.
2. It requires employers to spend more to ensure they’re in compliance with the new rule. The DOL estimated it will cost companies $677 million just to comply. Wouldn’t that money be better spent on compensation for workers than on compliance? Could people actually lose their jobs as companies look to find the money to cover the new cost of compliance?
3. It causes many workers who took pride in being salaried and benefited from the freedoms it allowed to now punch a clock, likely resulting in a decline in morale among them.

The new overtime regulations will likely prevent the minority of employers that routinely don’t fairly compensate their employees from doing so. But like with many rules, it is going to penalize everyone else—employees and employers alike—who otherwise have been working together to mutual benefit.