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Obama's overtime plan is hardly a job killer

Rick Newman
Senior Columnist
The Exchange
Obama's overtime plan is hardly a job killer

For President Obama’s critics, there’s a reflexive, two-word answer to every policy they oppose: job killer.

Obamacare was a job killer. The president’s plan to raise the minimum wage to $10.10 an hour is a job killer. And now, Obama’s plan to allow more workers to qualify for overtime pay is — everybody, now — a job killer.

Obama’s policies certainly have a few flaws, one reason some of them can’t get through Congress. But his latest plan to use executive authority — rather than legislation passed by Congress — to help as many as 10 million workers qualify for overtime pay seems to be anything but a job killer. If anything, it could help create a few jobs, though its overall impact on the economy will probably be minimal.

Obama signed a memo Thursday ordering the Labor Dept. to develop a detailed proposal meant to raise overtime pay, which could take months. "Today, millions of Americans aren't getting the extra pay they deserve," Obama said during a White House signing ceremony. "In some cases, [it's] possible for salaried workers to be paid less than the minimum wage." The rules governing overtime pay have been updated infrequently, with inflation eroding the thresholds. As Obama pointed out, somebody earning as little as $23,600 per year can now qualify as management exempt from overtime rules. 

Two big changes

The new plan will do two things. First, it will raise the pay threshold above which salaried workers are exempt from getting paid overtime, which means more workers will qualify for overtime. The cutoff is currently $455 per week, meaning salaried workers who earn more can’t qualify for overtime, even if they work 55 or 60 hours per week. Obama hasn’t said yet what the new threshold will be, but some recommendations call for raising it to $1,000 or so. Since business interests will have a say in the new rule, it could end up settling at around $700 or $800 per week.

The second change will be stricter enforcement of rules defining who qualifies as a “supervisory” worker, which is another way some employers get around paying overtime. Employers will no longer be allowed to give workers token supervisory duties and then declare them ineligible for overtime, as some do now.

To understand how this policy change might play out, put yourself in the position of a small-business owner running a 20-person operation — the type of firm most likely to be affected by such rules. If you have a few workers who weren’t receiving overtime pay under the old rules but will under the new ones, you’ll have a couple of choices. You can keep your payroll the way it is and simply pay the overtime, which will add to your expenses and detract from your bottom line. You’ll have a smaller profit but some of your workers will have more take-home pay.

If that’s too much of a strain, you can cut those workers back to 40 hours, and hire part-timers to make up the difference. Your labor costs will go up, but not by as much as if you had paid time-and-a-half to somebody receiving overtime pay. You’ll simply pay the new part-timers at a regular hourly rate (thus creating some part-time jobs, by the way).

Increased efficiency?

You’re also likely to smooth out your employees’ hours so you’re getting the most work out of them overall while minimizing overtime pay. This alone will probably create some efficiencies that benefit you and your employees both.

To create a scenario in which more overtime pay actually costs the economy jobs, you’d have to argue that the added cost of hiring part-time workers to do work full-timers used to do beyond 40 hours  — basically for free  — is so onerous the company would lose business, be forced to lay off other workers, or shut down altogether. Is there any such business, so dependent on unpaid overtime that it can’t function without it? Maybe an illegal sweatshop or two. But any legitimate business that meets this description is probably underpricing what it sells or doing something else terribly wrong.

Obama’s minimum-wage proposal, by contrast, is thornier, because raising the base pay rate could push up labor costs starting with the very first hour each worker logs weekly. If you run a business that employs minimum wage workers, you have to bear that cost no matter how you deploy your workers. When pay raises don’t kick in until the 41st hour of weekly labor, however, you’ve got a lot of wiggle room before your costs begin to rise.

The new rules still have to go through a lengthy regulatory process in which the Labor Dept. officially proposes a detailed rule, businesses and members of the public weigh in, and the Labor Dept. revises the proposed rule into a final version. So businesses could have a year or more to plan for the changes. For anybody capable enough to run a business in the first place, it won’t take nearly that long to figure out clever solutions.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.