Sunday, May 15, 2016

The Insane Department of Labor Proposed Regulation Changes That Will End Up Cutting Base Salaries If Enacted (And Cause Major Trouble for Start Ups)

Jared Meyer explains the proposal here:
Although it is almost 80 years old, the Fair Labor Standards Act remains central to the American labor market. One of its mandates requires employers to pay certain classes of employees time-and-a-half for every hour worked beyond 40 in a week. While numerous exceptions from the overtime mandate exist, the Department of Labor recently proposed to drastically alter the “executive, administrative, or professional” (EAP) exemption. Under the current rules, salaried employees must earn at least $455 a week to qualify for the EAP exemption. In the name of ensuring workers are not “overworked” and “underpaid,” the DOL’s proposal more than doubles the earnings threshold to $970 a week.
DOL claims its proposal encourages additional hiring, improves employee well-being, and leads to higher paychecks. President Obama has called it a raise for middle-class families. 
Meyer also discussed the DOL proposal with  Liya Palagashvili, an assistant professor of economics at SUNY, Purchase:
Jared Meyer: The central component of DOL’s proposal is an update to the EAP exemption, which would remove the exemption from an estimated five million workers by setting the threshold at a proposed annual salary of $50,440, up from today’s level of $23,660. What problem is the DOL trying to solve with this proposal?

Liya Palagashvili: The DOL gives us two official goals of this proposal: To “spread employment” and to increase worker health. There is another goal that is going around in the media, which is to raise employees’ wages. The idea with the first two official goals is that current employees will be expensive to hire after they have worked 40 hours a week, so employers will hire other workers—hence “spreading employment.” If employers are hiring other workers and not making their current employees work more than 40 hours a week, then they are helping to “increase worker health.” The third unofficial goal is that employees will see their wages increase because employers will have to pay them time-and-a-half. The problem that the DOL is trying to solve is an underpayment or overworking issue. Basically, there are some employees who are working over 40 hours a week, but are exempt from the overtime pay regulations. The regulation seeks to help them.

JM: A large portion of your paper is dedicated to exploring how the DOL dramatically underestimated the unintended consequences that its proposal will place on the very workers it is trying to help. If implemented, what will happen to employees?

LP: We find strong empirical evidence that employers will cut base salaries in response to the new regulation. For example, if you are a marketing associate making $40,000 a year, and your employer now has to track your hours and pay overtime, then one response by employers is to cut your salary down to, for example, $33,000, to offset the anticipated cost of paying overtime.

It is unfortunate that the DOL is not honest about this implication of its regulation, as the department only focused on the potential positive aspects. Employers can also respond with eliminating that junior role of marketing associate and hiring another employee at a senior role, such as a marketing coordinator, who can justify be paid above the $50,440 threshold. The last thing that a regulation should do is eliminate entry and junior role jobs—especially given the current problems that recent graduates are having finding jobs....

JM: Your paper discusses the effect of this regulation on tech startups. Why will this promising industry be one of the hardest hit by the DOL overtime regulation?

LP: One other major issue is that the DOL does not provide an analysis of how this regulation will affect the diversity of industries in the United States. Specifically, the department does not tell us how the overtime regulations will change our most dynamic sector, the tech startup industry.

Putting aside expensive software engineers, startups have many roles in marketing, operations, finance, and customer service that would fall in this salary range. The problem is that startups do not have a strong revenue stream. Their margins are very small, and that is one of the reasons they pay employees in equity instead of cash wages.

Furthermore, any adjustment to comply with this law will come at a high price. Most small startups do not have in-house counsel; the lawyers who work with start-ups typically charge between $350 and $800 per hour, and legal costs for noncomplex matters (such as payroll and worker classification) are about $5,000 a year. For a company that is trying to get off the ground and battling the hurdles presented by constant fundraising, this is a real dent in the wallet.

Furthermore, unlike assembly line jobs, there are complexities surrounding what it means to be “working” at a startup. Does checking work email on the weekend count as work? Should employees clock their hours if they are researching marketing strategies one evening? Do lunch meetings count? These questions and many more remain. Major aspects of the overtime regulation are premised on a traditional view of what it means to work and on a traditional view of compensation structure. But these factors are not easily applicable to the 21st century—in particular, to tech startups.


  1. This could also make travel for work out of the question for employees under the threshold. these junior employees could be basically locked out of important convention meetings where the deals are negotiated, stuck in the office catching up on filing and answering the phone.

  2. It seems that this huge wave of new regs coming out of all the D.C. agencies are focusing laser-like on small and startup businesses. Of course these businesses are the generators of growth and new employment. I don't think this is coincidental. Is the government TRYING to destroy the American economy?
    I remember (being an old guy) the testimony of the despicable David Kessler in his FDA confirmation hearing (or maybe some other hearing). He stated that one of his goals for the FDA was to reduce the number of pharma firms to "4 or 5", the better to control them. He was confirmed of course. He was a Bush I appointment but was retained by the Clinton I administration.

    So, what's happened since then, extrapolating Kessler's goals to like minded bureaucrats in other agencies? Count the number of banks, insurance companies, computer companies, etc. The better to control? But by God, don't EVER call it fascism.

  3. Re: Kessler's comments:
    Just saw this on the Burning Platform.
    Kitty Werthmann (a witness to Nazi rule in Austria):
    "If the government owned the large businesses and not many small ones existed, it could be in control."