In the name of fairness, the Obama administration this May issued a final rule dramatically raising the maximum base pay under which salaried employees can qualify for overtime status. Unfortunately, this move could give fairness a bad name. Last Tuesday, September 20, officials in 21 states filed suit in Plano, Texas federal court to enjoin the U.S. Department of Labor (DOL) from enforcing the rule, which is set to take effect December 1. The suit, led by Attorneys General Ken Paxton (Texas) and Adam Laxalt (Nevada), is challenging the rule on grounds that it usurps congressional authority and invites job losses. “Once again, President Obama is trying to unilaterally rewrite the law,” said Paxton in a prepared statement. “And this time, it may lead to disastrous consequences for our economy.”
Union Corruption Update analyzed this issue nearly four months ago. On May 18, the Department of Labor’s Wage and Hour Division, at the strong urging of President Barack Obama and Labor Secretary Thomas Perez, issued a final regulation raising the eligibility threshold for salaried worker overtime compensation from $455 per week to $913 per week. In annualized terms, that represents a hike from $23,660 to $47,476. The new threshold will be updated every three years. An estimated up to 4.2 million persons previously ineligible will receive “time-and-a-half” wages for each hour worked beyond 40 hours in a given week. In turn, their employment status will be converted from salaried to hourly. Introducing the initiative at a White House ceremony back on March 13, 2014, President Obama declared: “Overtime is a pretty simple idea. If you have to work more, you should get paid more.” More than two years later, the Labor Department in May stated: “This long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.”
On the surface, shrinking the applicability of this “white-collar exemption” is the right thing to do. Overtime protection applied to 62 percent of all full-time salaried workers in the U.S. back in 1975; today they apply to just 7 percent. The threshold was last raised in 2004 during the Bush years. Underneath, however, the rule contains various trip wires that NLPC discussed back in June. The regulation overlooks the possibility that employers have legal ways of getting around the rule. It lessens scheduling flexibility for workers who will be reclassified as hourly. It likely will delay career advancement for younger salaried employees. It will impose substantial compliance costs upon employers and taxpayers. And it will feed the ongoing proliferation of employee lawsuits over classification and overtime eligibility. Given such likely unintended consequences, businesses, especially small businesses, may be forced to cancel expansion plans and even scale back operations.
Anticipating such outcomes, Sen. Tim Scott, R-S.C., and Rep. Tim Walberg, R-Mich., this March introduced the Protecting Workplace Advancement and Opportunity Act (S.2707, H.R.4773). This legislation would nullify the new rule and to require the Labor Secretary to conduct a full analysis of any future overtime rule changes on small businesses. The proposed legislation would not prevent future hikes of the white-collar exemption threshold, but it would require the Labor Department to justify them in advance. The Senate Committee on Small Business and Entrepreneurship held a hearing on May 11, but neither Senate nor House lawmakers have taken action. And they’re not likely to do so anytime soon.
With the December 1 regulation launch date approaching, 21 states have made clear they’re not waiting for federal action. On September 20, their attorneys general filed suit in U.S. District Court for the Eastern District of Texas against the Labor Department to block implementation of the rule. These states are (in alphabetical order): Alabama, Arizona, Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, New Mexico, Nevada, Ohio, Oklahoma, South Carolina, Texas, Utah and Wisconsin. Most have Right to Work laws. As the Eastern District of Texas has a reputation for moving cases along quickly (“the rocket docket”), it’s conceivable that a ruling could come down within several weeks.
The complaint has two components: legal and economic. From a legal standpoint, the suit argues that the rule runs contrary to congressional intent of the Fair Labor Standards Act of 1938, which created the minimum wage. The suit reads: “The new rule exceeds constitutional authorization…Under the new overtime rule, states must pay overtime to state employees [who] are performing executive, administrative or professional functions if the state employees earn a salary less than an amount determined by the executive branch of the federal government.” The lawsuit also argues that because its threshold will be adjusted upward every three years, the rule change overrides established federal executive branch rule-making procedures that take into account the nature of work as well as salary. Trade associations make this point as well. “We spent quite a bit of time saying that we don’t think you have the authority to do this,” remarked Angelo Amador, senior vice president and regulatory counsel for the National Restaurant Association.
The suit also has an economic rationale: Employers will experience unduly burdens. To more than double the base pay threshold, say the plaintiffs, will invite extreme fiscal stress upon states and localities. Nevada Attorney General Adam Laxalt explains: “This rule, pushed by distant bureaucrats in D.C., tramples on state and local government budgets, forcing states to shift money from other important programs to balance their budgets, including programs intended to protect the very families that purportedly benefit from such federal overreach.” Business groups also fear consequences. Kristin McMillan, president of the Las Vegas Metro Chamber of Commerce, notes: “We believe that many employers across our state and country – large and small alike – will not be able to meet the high cost of these ongoing rate changes, and as a result, will be forced to curtail hiring or even lay off employees.”
The Obama administration is responding by accusing the dissenting state governments of “obstructionism,” of standing in the way of overdue justice. “The overtime rule is designed to restore the intent of the Fair Labor Standards Act, the crown jewel of worker protections in the United States,” remarked Labor Secretary Perez. “I look forward to vigorously defending our efforts to give more hard-working people a meaningful chance to get by.” As a federal court mulls over the issue, it should consider the possibility that many of the 4.2 million affected white-collar workers aren’t looking forward to being reclassified as hourly employees. Unlike the administration, they are likely to see the new rule as a demotion, not a raise.