Obama Overtime Mandate on Behalf of Salaried Employees Likely to Backfire

Is paying someone an annual salary, as opposed to an hourly wage, a form of exploitation even if the work is identical? President Obama thinks it can be. On March 13, Obama issued an Executive Order directing the Department of Labor to draft a regulation to expand the eligibility of salaried workers to receive overtime pay. The threshold would rise from the current $455 a week to an estimated $970 a week; employees making less effectively would be converted to hourly status and paid at an overtime rate for work done beyond 40 hours in a given week. The president insists the issue is fairness. “Overtime is a pretty simple idea,” he said at the White House ceremony. “If you have to work more, you should get paid more.” Yet the issue isn’t so simple. Indeed, the mandate may wind up reducing employee hours – and increasing employee lawsuits.

The new executive order should be seen in the larger context of an increased focus these past several months on economic inequality. The president and other top officials are pouring on the populism in decrying what they see as unacceptable gaps in household income and wealth. In a Washington speech last December, Obama stated: “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American dream, our way of life and what we stand for around the globe.” The president’s subsequent State of the Union Address on January 28 amplified those words. “Inequality has deepened,” he told the joint session of Congress. “The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by, let alone get ahead. And too many still aren’t working at all.”

The president is in good company. Secretary of Labor Thomas Perez believes unions are natural leaders in the battle to reduce inequality. At the AFL-CIO’s quadrennial convention in Los Angeles last September, he declared: “Workers’ right to join together and form a union to improve their lives remains essential to a thriving middle class, and together we must defend that right…Strong unions reduce inequality and build the middle class.” Meanwhile, the highly influential Robert Reich, who had served as Labor Secretary during the first Clinton administration, is a central figure in a recent documentary film, “Inequality for All,” which depicts our country as a playground for the super-wealthy lording it over everyone else. In an interview last September with far-Left media outlet Democracy Now!, promoting the film, Reich said, “Since the recovery, almost all of the gains have gone to the very, very top.” He elaborated: “People who are in the top 1 percent are doing even better than they did before the Great Recession, better than they have done since 1928. Most Americans are on a downward escalator. Median wage in the United States, adjusted for inflation, keeps on dropping.”

The administration is matching this sort of rhetoric with policy initiatives. President Obama on February 12 signed an executive order increasing the minimum wage of employees of federal contractors from $7.25 an hour to $10.10 an hour, effective January 1, 2015. He also has urged Congress more than once to raise the overall federal minimum to $10.10 an hour. A week ago he signed another executive order requiring federal contractors to break down their compensation data by race and sex. Meanwhile, the president’s proposed budget for Fiscal Year 2015 would expand the Earned Income Tax Credit (EITC) by doubling the maximum payment for childless workers and increasing the maximum income level at which the credit is phased out. The budget also would widen the eligible age range. All told, the proposed EITC revisions would create a larger credit for 7.7 million workers and make eligible for the first time another 5.8 million workers. These expansions would be on top of the temporary EITC and refundable Child Tax Credit enhancements in the 2009 federal stimulus law that benefited about 16 million families with 30 million children. To pay for this expansion, the administration wants carried-over interest income accruing to investment partnerships to be taxed as ordinary rather than as capital gains income.

The Obama order to expand eligibility for overtime pay, issued on very short notice, fits in here. During the signing ceremony, the president complained that businesses, including those in the information technology industry, are classifying many types of employees as “professional” or “administrative,” so as to exempt themselves from Labor Department Wage and Hour Division overtime requirements. In the process, many workers who put in well over the standard 40 hours a week are getting the shaft. The current overtime threshold for salaried workers (29 CFR, Part 541), last revised in 2004, is $455 a week, or $23,660 a year. At a press conference the day before the formal issuing of the order, top White House economic adviser Betsey Stevenson declined to say what the new salary ceiling would be. Yet she did admit this much: “What we know right now is the threshold has been eroded by inflation, and there are 3.1 million people who, if the threshold had kept up just with inflation, would automatically be covered by overtime provision.” The Wall Street Journal already had developed its own estimate, based on data provided by the Washington, D.C. litigation firm of Fortney & Scott: $970 per week. That works out to $50,440 a year.

Supporters say the action is long overdue. “Due to years of neglect, one of the linchpins of the middle class, the overtime rules that establish the 40-hour workweek, have been eroded,” remarked an unnamed White House official prior to the signing. “As a result, millions of salaried workers have been left without the protections of overtime or sometimes even the minimum wage.” Organized labor is sounding the same note of discontent. “It is time to update those (overtime salary threshold) levels and index them to prevent more and more workers from losing overtime protection every year,” noted the AFL-CIO on its website.

Business groups counter that raising the overtime bar would depress future hiring. “The president’s plan to increase overtime pay demonstrates another anti-business policy – coming on the heels of a proposal to increase the minimum wage, increase the minimum tipped wage, rising health care costs, as well as ever-growing, costly and unwieldy regulations,” said Eric Reller, spokesman for the National Federation of Independent Business. David French, senior vice president of government relations for the National Retail Federation, likewise said, “Just on the surface, this looks like an enormous new administrative burden.” These and other trade associations have good reason to believe as they do. Obama’s executive order, under the premise of distributing prosperity more fairly, may undermine it. There are several reasons why.

First, an expansion of overtime eligibility would give employers every incentive to reduce base salaries by converting positions from an annual to an hourly pay rate. In the process, the executive order, intentionally or not, would be a gift to plaintiff’s attorneys who specialize in the fast-growing field of overtime lawsuits. Paul DeCamp, a lawyer with the Washington, D.C. regional office of Jackson Lewis and administrator of the U.S. Labor Department’s Wage and Hour Division during President George W. Bush’s second term, is strongly opposed to the new policy: “The result will be to convert a whole lot of salaried employees into hourly workers who punch a clock and have their time micromanaged by others…This would be the Affordable Care Act all over again, with employers cutting employee hours.” Back in January 2006, for example, a group of salaried IBM employees in the company’s California offices filed a federal lawsuit against the Armonk, N.Y.-based company (Rosenburg et al. v. IBM) on grounds they had been unfairly denied overtime pay. They had been earning on average $77,000 a year. The company settled the case that November for $65 million to be distributed to 32,000 current and former employees. After court approval in July 2007, IBM cut base pay by 15 percent for some 8,000 employees, taking into account future overtime claims.

Second, and related, more overtime eligibility means more lawsuits. Since 2000, the number of wage-and-hour lawsuits in the U.S. increased by 400 percent or more. And the most common issue in such cases is overtime back pay. Plaintiffs charge that employers, in seeking to squeeze extra work from their employees, are resorting to illegal tactics. They include : forcing employees to work off the clock; misclassifying jobs to make them exempt from overtime regulations; and forcing employees to use smart phones and other technology during their personal time so as to barrage them with work-related e-mails and text messages. While employers, no more than employees, have a right to breach contractual obligations, a growing number of these lawsuits have been motivated by a “come and get it” attitude pushed by the plaintiff’s bar. The prospect of being hit with outsized judgments can be enough to motivate even major employers to settle. In November 2011, Oracle agreed to pay $35 million to settle claims by more than 1,600 software testers, technical analysts and project managers that they were misclassified as administrators or professionals, and thus entitled to back overtime pay. The company, while not admitting wrongdoing, believed that settling was more expedient than risking courtroom defeat. Companies are especially vulnerable to copycat lawsuits. In mid-2007, as a federal judge was working out the details in the Rosenburg case, IBM sales employees, in two federal class action suits, each filed in California, accused the company of denying current and former sales specialists overtime pay. It would a major stretch to call that a coincidence.

Third, the proposed rule change would eliminate flexibility in work arrangements, especially for employees working from home. Because employers have to log in employee hours to avoid lawsuits, they are likely to discourage them from working at home via computer and telecommuting. According to a June 2011 survey by the HR Policy Association of member companies, nearly a third of all 155 respondents reported they had restricted employee telecommuting. And 55.6 percent said they had curbed the use of communication devices outside the office. Johnna Torsone, human resources chief for Pitney Bowes, noted a couple years ago that her company was considering giving about 30 overtime-eligible sales support staffers the ability to work from home, but held back due to difficulty in determining how to track time. “You just don’t take the risk,” she said. What she meant was risk of a lawsuit. And fear of a lawsuit undermines productivity and morale. As Heritage Foundation labor policy analyst James Sherk, a critic of Obama’s executive order, explains:

Workers eligible for overtime cannot get paid for their results and productivity. Their employer must log their hours and pay for time on the job. While this presents few difficulties for workers in a fixed workplace (like a store), it makes much less sense for professional employees who can work anywhere. Today millions of salaried employees check their work e-mail on their smartphones, or telework form home…

Technological advances now give millions of Americans the freedom to work remotely. Nonetheless, most employers deny overtime-eligible workers this flexibility. They must track time worked or risk expensive lawsuits over back pay.

An increase in workplace rules, put simply, means an increase in the opportunities for lawsuits over violations of the rules. The result is a risk-averse environment that undermines innovation.

Fourth, President Obama’s executive order will lead to more time and money spent by employers to comply with record-keeping requirements. Under the Fair Labor Standards Act, employers must pay salaried employees for overtime if their base pay is less than the equivalent of $455 per week. Additionally, employers may have to pay overtime to salaried employees who make more. Those not covered by the FLSA provision include executives and administrators with broad supervisory authority; professionals whose positions require substantial education and training; and information technology and sales employees whose working hours are not easily tracked. Determining whether a given employer must pay overtime can be far from an easy call. That is why employers are spending large sums of money, whether in-house or on consultants, to determine employee classifications in hopes of averting a lawsuit. That is also why the U.S. Department of Labor is spending large sums investigating potential violations of wage and hour regulations. During 2010-11, for example, the DOL added 300 investigators to its Wage and Hour Division, effectively increasing its staff by some 40 percent.

The President’s proposal will take a while to be realized as a final agency rule. The Bush administration spent two years putting in place the current overtime rule back in 2004. The DOL Wage and Hour administrator in charge of that effort, Tammy McCutchen, now a litigator with Littler Mendelson, says the Obama administration anticipates taking 12 to 18 months to update the standards. The result likely will trigger overtime wages for millions of salaried employees. Many employees may respond by cutting hours. If that happens, expect a further upswing in employee class-action lawsuits. As it is, employers across the country, such as IHOP, Regal Entertainment and Five Guys, are cutting schedules of full-time employees to less than 30 hours a week in order to avoid expensive insurance coverage mandates of the new health care law. It would be naïve to think something similar can’t happen with an expansion of overtime eligibility. When combating economic inequality is the name of the game, consequences become of secondary importance.

Related:

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