Another day, another labor market intervention!
Recently, the Biden administration has announced new rules regarding overtime pay and salaried employees. Generally, salaried employees are paid a flat rate, not paid by the hour, and as such don’t get traditional overtime pay. But legislators have decided that lower-paid salaried workers should also get overtime pay. This itself isn’t new – what is new is that the Biden administration is increasing the salary cap for this rule to apply. According to the Labor Department, starting July 1st, salaried employees making less than $43,888 per year will now get overtime pay, and by 2025 that will increase to $58,656.
There are a number of concerns one might raise. This rule will make less experienced workers more expensive to hire than they were before. Someone you might have been willing to hire in an entry level position for a $40,000 per year salary may suddenly become a less attractive prospect – leading you to favor hiring someone with a more established work history and better skill set. Anecdotally, I frequently hear people complain about how hard it is to find even entry-level jobs, and it’s not helpful to such people to pass laws that make it even more expensive to hire someone for an entry-level position. But perhaps this will be offset by including fewer benefits and perks, instead of hiring fewer entry-level workers. There are multiple margins that could be adjusted.
But what struck me about the Labor Department’s announcement was the following line:
I found this very confusing. I have worked salaried positions that were below the minimum caps currently in place. There were definitely times I worked more than 40 hours per week as well. Yet I didn’t demand, or expect, overtime pay, because I had already agreed to a set salary as part of the process of negotiating for the job. If someone then said to me “Oh no! You put in more than 40 hours a week but didn’t get additional overtime pay for it! A promise has been violated!” I would have just stared at them and wondered what on earth they were talking about. I was being paid the wages I was promised – there was never any agreement between me and my employer that workweeks extending beyond 40 hours would yield extra pay. So what promise was being violated? Who made that promise?
Secretary Su is talking about restoring a promise that was never made by anyone actually involved. If I had started receiving payment below my negotiated salary, that would have been a violation of a promise. And that’s a role government can usefully serve – if my employer had promised me a particular salary in the employment agreement, but didn’t follow through, the government could appropriately take steps to restore the broken promise. But this new rule isn’t anything like that. This isn’t the government enforcing an existing promise (or contract) that had been made between two consenting parties. This is the government stepping in to a promise that’s being upheld as agreed, and forcefully breaking the promise after the fact. Secretary Su’s actions are better characterized by the words of Darth Vader in The Empire Strikes Back: “I am altering the deal. Pray I don’t alter it any further.”
READER COMMENTS
Steve
May 15 2024 at 10:31am
One of the advantages of salaried work is that I can work less than 40 hours in a week without my pay being docked. As long as I get my work done on time and done well, neither my employer or I care about when the work happened.
But if my employer is now forced to pay me extra for working over 40 hours a week, are they allowed to dock my pay if I work less than 40 hours? That only seems fair.
Richard W Fulmer
May 15 2024 at 11:10am
True. That would restore the promise to employers.
Richard W Fulmer
May 15 2024 at 10:52am
More disturbing than the probable ill effects of the new intervention and the dishonest rhetoric used to justify it, is the executive branch’s assumption that it can, once again, usurp Congress’ legislative power.
steve
May 15 2024 at 2:57pm
I always thought anything less than 70 hours was a short work week. That aside, what really happens with salaried workers depends upon the labor market. When the labor market is tight then mgt is careful about working people past 40 hours. It makes it hard to retain staff and hire new ones. When the labor market has an overabundance of workers, mgt is more likely to require more hours without compensation since they know workers have no good alternatives to go work elsewhere. (Note that these are not absolutes, just more or less likely.) Same thing happens with hourly workers where an employer can demand that workers put in time off the clock if the labor market is tight.
I think good employers, which would include most employers I think, tend to find some way to compensate employees if they are truly having to work excessive hours, stuff like comp time or extra pay. Not so good, abusive employers dont.
Steve
Dylan
May 15 2024 at 2:57pm
I agree with everything written and also the comments here, particularly on what if you work less than 40 hours.
But, it also reminds me of my time working in retail a long time ago. It was a fairly well known fact that moving into management was a suckers offer. You worked longer hours and because you were salary, your hourly wage ended up going down. At the store I worked at, 50 hours was the minimum requirement for a salaried store manager, and they would bring home less than $20K per year. Often, the schedule would be much more demanding than that, and your hourly wage would be less than the minimum. Because of these dynamics, they had a lot of trouble promoting people. The best employees would turn down the promotion, leaving only those that didn’t know better or the ones that really liked the power to take the job. When I first started, I thought that was short sighted of the employees that turned them down, yeah, it might be a bit of a pay decrease in the short term, but in the longer term the extra responsibility would pay off in career advancement. Turned out, at least in my small group of people that I still keep up with, that was completely wrong. The ones who went into retail store management ended up getting stuck in that career, while the other folks I worked with by and large went on to do really cool things.
Monte
May 15 2024 at 6:38pm
It rankles me. This is outside the purview of the Labor Dept, which should not be dictating to employers how they choose to compensate their salaried employees. But no surprise. Under her watch as California Labor commissioner, fraudsters bilked the state out of $32 billion in unemployment claims. She’s a Marxist who is supported by the Communist Party and who despises free markets. Further, she’s written that “by definition, corporations promote and perpetuate economic injustice and should be considered a public nuisance.” Seriously?
David Seltzer
May 16 2024 at 6:45pm
Monte: “Further, she’s written that “by definition, corporations promote and perpetuate economic injustice and should be considered a public nuisance.” Seriously?” Nah! I suspect Julie has a lot of those public nuisances, corporations, in her 401k and other Cali retirement fund accounts. If one of those despicable corporations misses a dividend, she would be at the next shareholder’s meeting demanding answers.
Monte
May 16 2024 at 11:02pm
Yes, the hypocrisy of political elites never ceases to amaze.
David Seltzer
May 16 2024 at 6:31pm
Kevin: “But legislators have decided that lower-paid salaried workers should also get overtime pay.” Lower paid salaried workers are paid less for several reasons. Among them; Less experience. The cost of training is borne by the firm. They may at the margin, be less productive than higher salaried employees. If I, as an employer, must pay overtime wherein marginal revenue is less than the marginal cost of those workers, I would find a better alternative to them. Employers might hire less of those people and replace them with technology that replicates their productivity.
Dylan
May 17 2024 at 10:45am
I don’t disagree with your claim here, but I think it is worth noting that the relevant comparison they are targeting is lower paid salary workers vs. similar hourly workers. They are trying to target employers classifying hourly workers as salary in order to get out of paying overtime. Which is yet again an example of having to regulate something to take care of an unanticipated (but easily predicted) consequence of previous regulation (mandating overtime pay for hourly workers).
David Seltzer
May 17 2024 at 11:36am
Dylan: Good point. Thanks.
Peter
May 27 2024 at 5:16pm
Meant to comment on this awhile ago, catching up, but I’m going to defend this rule though not on libertarian grounds because the we don’t live in a free employment market, but a regulated one, so it’s a red herring.
I find it interested how many people here seem to live in a fantasy world though given the commentorship, i.e. people that either seem to like their jobs hence actually work as it’s more a paid hobby / vocation or people that haven’t experience the average salary worker. I forget the study, there have been multiple that suggest the same, that on average white collar works tend to work at most, eight hour a week if that. Most of my career I’d consider it a productive week if I even got four hours of actual productive work out of someone or even worked more than fifteen minutes myself. I generally play video games with people who are in the office “working”. Busy work is rife in all industries and what is busy work but simply wasting time to meet your pro forma hour expectation. I say this because in reality you won’t be employed long as a salaried work coming in Monday, doing your eight productive hours, and then taking off the rest of the week even though you are doing the identical amount of work, maybe even more so. Salary in American means “40+”, not “do your work and leave” which is how the narrative is sold hence employers take advantage of that false messaging using the power imbalance outside niche high value employees.
My compromise here would be rather than mandate overtime for salaried employees doing over 40, we instead change the rule to be more like the W2/1099 pretend employee rule, i.e. “if you are treating your salaried employee like a hourly employee including setting schedules, tracking hours, not assigning goal oriented open ended tasks and for all intents and purposes is practically indistinguishable from an hourly wage employee, you will pay overtime and at triple time; there will be no underpayment for less than 40”.
The other problem with all these laws tied to “40/week or 8/hr day” is it makes the transition to 35/wk or 10/hr day like you are seeing in much of the Western world more difficult as it sets the expectation, i.e. “Why would we got to a 4 day a week work week if we have to pay you OT for 10 hours days” or “Why would we let you work 35 at a 40 hour wage”. TBH hourly wage should just go away period in all industries, should just move to pay for performance even if your performance is “push button in factor for 8 hours from 9-5” .. hourly wages is generally something that is bad for employees hence their stickiness.
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