Randy Zook: Proposed Federal Overtime Rule Is Divorced from Reality

Editor’s note: Randy Zook, author of this guest commentary, is the President & CEO of the Arkansas State Chamber of Commerce/Associated Industries of Arkansas.

Instead of pro-growth policies that lift up Americans’ wages, the Obama administration has a bad habit of hoping wages will magically rise through coercive, anti-growth policies.

That’s what’s behind its push for a redefinition of overtime eligibility.

The administration’s recent proposal to expand overtime eligibility to some five million more Americans will curtail work hours and suppress job growth as employers work around the rule to control costs. The plan would more than double the eligibility threshold for overtime pay, to $970 a week from the current cutoff of $455 a week, last adjusted in 2004.

The administration is ignoring basic economic principles. Making more employees eligible for overtime by severely restricting the exemptions will not guarantee more income, but instead will negatively impact small businesses and drastically limit employment opportunities.

Many reclassified employees will also lose benefits, flexibility, status and opportunities for advancement. This change is another example of the administration adding more burdens to employers and expecting them to just absorb the impact.

A recent article in the Wall Street Journal confirms the real world effects of this arbitrary edict. First, workers’ hours will be cut:

The rule is “going to force more people into part-time work, and we’re already seeing that with Obamacare,” said Scott Gittrich, the founder and president of Toppers Pizza Inc. in Whitewater, Wisconsin. He said he would adjust employees’ schedules and base wages to avoid spending more on labor under the new rule.

And businesses’ costs will pile up:

Before the proposal was released, White Castle System Inc., a hamburger chain based in Columbus, Ohio, with about 400 general managers who earn annual salaries of between $45,000 to $54,000 and are exempt from overtime pay, had estimated it would cost the company between $8 million and $12 million a year to compensate the managers for the overtime they work. The majority of those managers will qualify for overtime pay under the new salary threshold and the company is trying to figure out how to adjust to that added cost.

There will also be less opportunity for companies to grow and hire more workers. Profit margins for companies as a whole are already thin, in the mid-single digits overall and about half that for restaurants. Companies hit by the added cost of this new regulation will have a harder time investing in their workers and their businesses.

U.S. Chamber of Commerce Deputy Chief Economist J.D. Foster wrote about the economics of this last year:

“In the real world, where the rest of us live and in particular where businesses must do business, make payroll, and make a profit, the obvious effects of this new overtime regulation are quite different. The most obvious effect is employers will be forced to hold back growth in all other forms of compensation including non-overtime pay scales for the affected employees.”

Take Harry the junior accountant, for example. Harry makes $12.50 an hour plus benefits and takes home $500 a week before tax. But Harry typically works 45 hours a week, sometimes more. As Harry is a real go-getter just starting his career and with much to learn, Harry’s happy to have the opportunity. His true hourly rate is just over $11 an hour but when you add in the value of his on-the-job training as a rising professional he’s really getting paid much more.

Now along comes the new overtime rule. In the administration’s happy land, Harry’s weekly take home pay before tax jumps about $100 a week to about $600 or more and Harry is a very happy camper. In the real world, Harry may be told to go home at 5 o’clock, thus limiting his on-the-job training, or he may be forced onto the Obamacare health exchange and/or see his wages flat line for a few years. There’s not a lot of happiness for Harry in the administration’s happy land.

If the intent is to help the middle class, this is a foolish way to do it. Once again, unintended consequences will produce an unexpected – and undesirable – outcome.