Email from a Business Leader: I’ve Got News For You on Overtime

Last night the Department of Labor and President Obama announced new rules regarding overtime. The overall changes are about overtime eligibility for salary employees. The FACT SHEET hits the following points:

Raise the salary threshold from $23,660 to $47,476 a year, or from $455 to $913 a week.

Raise Americans’ wages by an estimated $12 billion over the next 10 years, with an average increase of $1.2 billion annually.

Extend overtime protections to 4.2 million additional workers who are not currently eligible for overtime under federal law.

Update the salary threshold every three years.

Raise the “highly compensated employee” threshold — from $100,000 to $134,004 — above which only a minimal showing is needed to demonstrate an employee is not eligible for overtime.

Respond to employers’ concerns by making no changes to the “duties test” and allowing bonuses and incentive payments to count toward up to 10 percent of the new salary level.

This all sounds great and sounds like the right thing to do. What will actually happen isn’t what they’re intending. Businesses are paying a market wage for the role a person is filling today. Most workers today are at-will meaning if they believe they are being treated unfairly or being under compensated they can go work for another company.

Here is what I believe the real outcome of this will be. I could be wrong or I could be missing a detail that prevents the scenario I’m going to lay out. If you see a flaw in my analysis I’m inviting you to call me out and correct me.

We can use the $35,000 per year salary Administrative Assistant, who works 50 hours per week today, provided by Secretary of Labor Thomas Perez as a hypothetical example in an interview with NPR this morning. I’ll assume they get paid vacation so $35,000 / 2080 (52 40 hour weeks) is $16.83 per normal hour or $25.24 per overtime hour.

At first glance this sounds great — an additional $12,620.19 in pay for the 500 hours of overtime (10 hours per week for the 50 weeks worked, 2 weeks of vacation at 40 hours). Our hypothetical Administrative Assistant now makes $47,620.19 or gets 10 hours per week of time back.

The harsh reality of what will happen — They get a pay change notice from their employer informing them their new hourly wage is $12.37 per normal hour and $18.55 per overtime hour meaning they’ll make the same $35,000 they do now with the additional burden of tracking their time and proving they’re in the office really working 50 hours per week to make the same they did before with the flexibility and freedom that comes with being on a salary.

But what about $15 minimum wage? In the case of $15 per hour minimum wage now they’re making minimum wage and working 170 hours of overtime (instead of 500) to still earn the same $35,000 — they get ~1 hour and 20 minutes per day of time back to their personal life. This isn’t likely what happens either because those 330 hours of work need to get done. So now the business has two choices: pay more or change processes to eliminate the 330 hours of extra work. For businesses to pay more this assumes extra profits are available to absorb an increase in labor costs. Big or small this isn’t the case. S&P500 earnings in Q1 2016 are the “worst since ‘09” (JPMorgan) shrinking at 8% per year right now. So this will push business to process change and with that change instead of having a $35,000 per year Administrative Assistant job now it is eliminated as the company mandates a switch to x.ai, a artificial-intelligence administrative assistant that can be hired without overtime rules, minimum wage, or all of the other burdens regulations put on businesses to employ people.