Obama Regulating A Tenuous Legacy With Overtime Rules

Bob Shire

In May the Obama Administration announced substantial reforms to the rules governing how U.S. workers are paid for overtime work. The new rules raise the income cap for those workers required to receive overtime payment for working over 40 hours a week from $23,660, set in 2004, to $47,476. The new rule also, rather than simply setting a level which will need to be updated later, pegs the cap to the 40th percentile of full-time, salaried worker earnings in the lowest-wage Census region (a distinction currently held by the South). While the current four Census districts are likely too large and could use some revision, this peg adjusts the wage cap level to roughly match inflation, with sensitivity to lagging regions, every three years. The cap will not be higher for wealthier regions, but businesses in rural northern Alabama will not have to pay workers more because of soaring wages in San Francisco or New York City. The new rule takes effect December 1, 2016, which the Administration says gives businesses time to adjust and comply.

This means, essentially, that employers of U.S. workers clocking in more than 40 hours a week and making less than the raised income cap will face a set of choices: 1) pay workers time-and-a-half for the extra hours, 2) keep workers limited to 40 hours per week, providing the workerthem with more free time and potentially spurring more hiring of full- or part-time workers, 3) raise the salary of the workers above the cap, 4) rebalance pay between salary levels and overtime, dropping the salary but keeping total net pay constant through higher overtime payments, or 5) be noncompliant with federal regulations. Of course, 4) and 5) are not superb options for workers and the rule of law, respectively, but the other three offer a more appealing picture for the 4.2 million workers the Department of Labor projects will have new access to overtime pay after this change. The left-leaning, pro-labor Economic Policy Institute estimates the number of workers affected overall, including less direct affects, to be a much higher 12.5 million and offers detailed tables by education group, age, and occupation. This rule will not affect all workers, however; the “duties test” exempts certain white collar workers, and smaller businesses, teachers, and students engaging in research are generally among those exempt.

These federal rule changes are being couched as an update to outdated rules and a victory for middle class workers. Vice President Joe Biden, while promoting the new rules, cited statistics drawing comparisons between 1975 and today to reinforce the “update” narrative. He said 62 percent of salaried workers qualified for overtime pay then, but only 7 percent do under current (pre-December 2016) federal rules. Proponents of the new overtime rules are highlighting options 1), 2), and 3) from above, and noting this move will likely help boost otherwise-stagnant wage growth. The Labor Department estimated the expected pay boost for workers over the next 10 years at $12 billion, with larger portions of the workforce with less than a college degree benefitting.

Of course, these regulations will be costly for some to comply with, and have sparked debate. Some non-profits have expressed concerns, including those working in health care and higher education, but the primary pushback has come from retail and other industry groups. Goldman Sachs estimates the new rules will create 120,000 new jobs in the first year, but those would skew to lower-wage, hourly positions. Benefits, bonuses, and hours could also see cuts, potentially contributing to underemployment and resulting in little change in overall compensation. Some also argue, including employer groups who pivoted to advocating for their workers in this argument, that employee prospects for promotions will be damaged due to an increased unwillingness among employers to boost employee hours.

While not a huge segment of the economy is affected, this change is significant, and it did not require an act of Congress. The Obama Administration can perform these actions through regulatory fiat because, simply put, laws are vague and Congress gave the President the power to make these decisions. Congress cannot feasibly, and often times logically should not, deal with the gritty details of how certain sectors of the economy and society should be governed. Certain Laws cannot be readdressed frequently enough to respond to relevant changes in the economy and society, and members of Congress and their staff often do not have the technical expertise to deal with these issues, such as those based on scientific research. The Fair Labor Standards Act, originally passed in 1938, sets the minimum wage at a particular level (directly set and updated by Congress) and requires overtime pay be one and one-half times the regular employee pay, but does not explicitly specify the wage cap the Administration is altering.

While not requiring Congress, these are not “stroke-of-the-pen” decisions. The rulemaking process is lengthy and political. President Obama first commanded the Department of Labor to revisit these rules in 2014, and proposed rules were made public in July 2015, garnering over 270,000 public comments (all of which must be read during rule consideration). Lobbying, dealmaking, and compromising occurs during the rulemaking process (the Dodd-Frank financial regulations have been notably slow), and this set of rules included some significant lobbying attempts to influence the outcome and revisions from the July 2015 draft rules. However, the President signaled soon after Republicans took control of the U.S. House of Representatives in early 2011 that he was interested in using executive action to pursue more of his policyies priorities.

Since gridlock consumed Congress after a rather productive first two years of Obama’s presidency, the Obama Administration has produced or pushed for major new regulations on climate change, pollution particulates and mercury, Medicaid payments, temporary legal status for undocumented immigrants, retirement advice, and many other areas paired with, or in lieu of, Congressional action. In the final year, the Administration is pushing for more to cement a policy legacy before handing off power in 2017.

The implications for the presidency as an institution are not dramatic to the point of threatening democracy, but they do represent a continued creeping of the “Imperial presidency,” which refers to the increasing bureaucratic and regulatory power of the President to shift resources and make policy. Senator Obama was a skeptic of growing presidential powers, particularly following increases during the second Bush administration, but appears to have embraced those powers as a way to achieve his policy goals as president. Despite the dramatic “imperial” title, the president’s powers are quite limited; Obama’s regulations have been repeatedly challenged in both Congress and the courts (those other two branches of government are providing checks and balances, as planned). Of course, these powers are held by the office, not the person, so a subsequent president could reverse these policy legacies and use those powers to achieve other ends. But, given Congressional inaction, the Obama Administration apparently feels comfortable asserting the president’s power in this manner to achieve policy goals. It’s a tenuous way to do so, but if employee pay is truly boosted by $12 billion over the next 10 years, it will be a legacy to which a former President Obama will be happy to point.