Big impact of shifting salaried workers to overtime rules

The Heritage FoundationMarch 23, 2014 

Millions of salaried workers may soon lose flexibility in how they work. President Obama plans to cover them under federal overtime regulations.

This won't raise their pay. It will, however, effectively convert them into hourly workers -- putting the kibosh on the flexible work arrangements many employees value.

Hourly employees get paid time-and-a-half for working more than 40 hours a week. However, under the "white collar exemption," businesses can pay many salaried employees for getting the job done, not simply for the hours they've logged.

To qualify for this exemption, an employee must make more than a minimum salary, work in a professional field, and have sufficiently advanced responsibilities.

President Obama plans to raise the salary threshold to expand eligibility. He has not yet said to what level, but observers close to the White House have suggested $51,000 a year.

If so, every salaried worker making less than that amount would qualify for overtime and would have to track their hours.

On the surface, this sounds great. Everyone wants workers to earn more. But these regulations will not accomplish this. Changing overtime eligibility does not actually raise workers' pay.

Why not? Most employers will compensate by cutting salaries an offsetting amount.

Businesses responded exactly this way to overtime eligibility lawsuits. IBM, for example, recently gave several thousand salaried technical workers overtime as part of a legal settlement. The company also cut their base salaries by one seventh. The workers take-home pay remained the same.

But while changing overtime regulations will have little effect on workers' total earnings, it will affect how businesses do their bookkeeping. Unfortunately, these changes will prohibit many popular work arrangements. It would effectively turn millions of salaried employees into hourly workers.

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 from home.

Many employees value this flexibility, especially working parents. For example, an investigative reporter might leave work early to attend his son's baseball game. Between innings, he might e-mail sources to set up interviews. Then, after putting his son to bed, he could continue writing at home on his laptop.

Such flexible work arrangements help parents balance their work and family lives.

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.

Research shows a third of large firms have curbed telecommuting because of overtime lawsuits. More than half have restricted the use of smartphones from home.

The head of HR for Pitney Bowes, a large manufacturer, recently told the press the company wanted to let sales-support employees work from home. They had to turn down the request; the employees qualified for overtime and the firm could not track their hours remotely. Did this benefit the workers?

The president may have good intentions, but good intentions do not repeal the law of unintended consequences. Expanding overtime will do little to raise overall pay.

Plus, it ignores the changing nature of work in the economy. Salaried workers do not need the government encouraging their employers to become less flexible about how they work.

James Sherk, is a senior policy analyst in labor economics at The Heritage Foundation, 214 Massachusetts Avenue NE, Washington, D.C. 20002; www.heritage.org.

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