Since the Obama Administration announced proposed changes to federal overtime rules last week, critics have challenged that the adjustments wont lead to the effects the administration is hoping for.
And now Wall Street is chiming in too.
“The expansion looks unlikely to produce more than a very slight bump in average hourly earnings once it takes effect in early 2016, but it could have a slightly more important effect on payrolls,” analysts at Goldman Sachs said in a note to clients on Tuesday.
“Since employers will want to avoid paying time-and-a-half for routine work, they may opt to limit overtime work and hire new workers to make up the difference.”
Current rules require employers to pay workers 150% of their normal pay for each additional hour they work beyond 40 hours per week.
Workers are exempt from overtime pay if they receive a fixed salary, make more than $US455 per week, or have a job that includes “executive, administrative, or professional” duties.
This last exemption has proved to be most controversial, as it automatically excludes certain professions such as teachers and lawyers — as well as other workers who perform a very small amount of managerial work in addition to their regular duties.
While changes to this specific exemption have not been proposed, Goldman says the Labour Department “has left the door open” for these changes to be included in the final proposal expected later this year.
What the Labour Department will change is the salary threshold, doubling it $US970 a week. This means all workers who make $US970 or less on a weekly basis, and don’t perform “executive, administrative, or professional” duties will soon be required to receive overtime pay.
In an interview with Business Insider last week, US Secretary of Labour Thomas Perez said that this initiative is aimed at giving leverage back to managers from employers, something that he argues was reversed as a result of Bush-era regulations.
As illustrated by the chart below, this jump represents the largest hike in the salary threshold since the Fair Labour Standards Act created the first overtime rules in 1938.
Beyond 2016, officials hope to automatically index thresholds with inflation or wage growth. They estimate only 1.2 million overtime workers will be affected, with 1 million of those being regular overtime workers.
So how will these changes affect these employees who regularly work overtime? Goldman says not much, as companies will likely tweak pay and hours to minimise payroll costs.
In some cases, employers may attempt to convert these workers to an hourly wage, lowering their pay in the process so that their total weekly compensation, including overtime, remains constant. Other workers, whose salaries are just under the exemption threshold (expected to be $US970/week in 2016), might see a small bump in their weekly pay to raise them above the new threshold. Finally, some employers are apt to restrict workers to 40 hours per week in order to reduce overtime costs. Since the cost of compensation for regular (non-overtime) work should not change significantly as a result of these rules, employers would have an incentive to hire more part-time or full-time employees to make up for the lost overtime hours.
“If employers respond to the increase in the salary threshold by eliminating some overtime work and hiring new employees, total employment could rise,” Goldman added.
Using estimates from the last threshold increase in 2004, Goldman predicts about a 10-15% reduction in the amount of employees working overtime in the pool of those affected. This, they say, will pave the way for about 120k new hires to do that work at a lower cost.
“By contrast, the effect on wages should be quite small,” the note said. “If all of the affected overtime workers were simply paid 150% of their regular hourly-equivalent wage on their overtime hours, this would boost the level of average hourly earnings by about 0.1 percentage point; however, since we assume that employers will offset most of the increase in overtime costs via reduced base pay and/or replacement of overtime work with non-overtime work, the actual effect is likely to be a fraction of this.”
In other words, the new overtime rules could end up helping the unemployed more than the current workers they are meant to support.