September 27, 2017

Comment on the Department of Labor's Overtime Rule

I am writing in response to the Request for Information (RIF) regarding the regulations at 29 CFR part 541. Specifically, I am addressing the Fair Labor Standards Act’s overtime regulation requirements.

The Mercatus Center at George Mason University is dedicated to bridging the gap between academic ideas and real-world problems and to advancing knowledge about the effects of regulation on society. This comment, therefore, does not represent the views of any particular affected party or special interest group but is designed to assist the US Department of Labor in evaluating these overtime regulation requirements.

During the period when the Department of Labor was changing the salary basis test in the 2016 Final Rule, my colleague and I had researched the economic effects of the overtime regulation, both generally and specifically in its impact on technology startups and telecommuting.

Based on the work we have done on this topic, I believe that in addition to the 11 questions posed by the Department of Labor in the RIF, the following questions and points are foundational to address before making changes to the regulation:

  1. In the current information economy, the nature and the structure of jobs are moving away from a traditional by-the-hour model that represented many 20th century manufacturing or service jobs. It is becoming increasing difficult to measure what “counts” as work because the new types of jobs seem to inch closer to the work model of, say, academia, where hours are not closely tracked and it is difficult to pinpoint exactly when an academic is “working” or “not working” for the university. Academia is typically exempt from overtime regulations for this reason. The Department of Labor should investigate whether new industries have emerged for which the hourly model—and thus perhaps overtime regulations—would be outdated. In those industries, the regulations would not make sense and may cause more harm than good.

    Another important question along this line is whether it counts as “work” if employees check email outside business hours to monitor correspondence with a client or colleague. If so, an employer could legally comply with overtime rules by cutting off email service between 5 p.m. and 9 a.m., but such an option would disrupt the flow of information that employees need to be efficient and effective. A host of other aspects of the new information economy (for example, telecommuting) require further investigation with regard to overtime regulations.  
  2. A diversity of labor contracts exists in the diversity of industries in the United States. The Department of Labor should seek to understand how the overtime regulations in general force some labor contracts, which were negotiated between employee and employer, to turn into another type of labor contract—one that is based on hourly wages. The diversity of labor contracts exists as a result of specific problems in each industry or type of job. A labor contract based mostly on commissions rather than hourly wages makes sense in sales but does not make sense in manufacturing. Thus, when employers and employees are, in effect, forced to use a specific labor contract—one based on hourly wages—there are structural changes and costs in those affected industries.

    Treating salaried employees as hourly employees undercuts a principal reason for paying salaries rather than hourly wages. Among the reasons that a worker is more likely to be paid a salary than an hourly wage are (1) the employer values that worker’s ability and willingness to flexibly perform a wider range of duties than are typically performed by hourly workers, and (2) the employer can better evaluate a worker’s value over a longer period than an hour or a day. An example of an industry with specific needs that necessitate a unique type of labor contract is technology start-ups. Employees who work in tech start-ups are paid a low salary but also receive equity in the firm. Tech start-ups tend to pay employees in this manner because they do not have enough funds early on to pay employees the salaries they might receive elsewhere. Start-ups thus offer equity arrangements to compensate for lower salaries.
    For more information on the implications of job structure and the diversity of labor contracts, please refer to the “Costs and Further Implications” section beginning on page 37 of the working paper linked below. 
  3. What is the problem that the Department of Labor is attempting to solve? It is important to investigate the problem before suggesting a one-size-fits-all solution. Pointing out that the salary threshold for exemption from the federal regulation for mandated overtime pay has not changed for many years does nothing to meet the burden of proof that must be met for imposing a new regulation. It is vital that the Department of Labor show evidence of a particular problem and discuss all possible regulatory solutions to the problem. Currently, no studies indicate that the lack of a federal regulation on overtime pay is a problem in a majority of industries, yet this is a regulation that affects a majority of industries.

For more information on identifying the underlying problem, please refer to the “Analysis of the Problem” section beginning on page 6 of the working paper linked below.

For further support of the arguments discussed here, please read my paper, coauthored with Donald J. Boudreaux, called “An Economic Analysis of Overtime Pay Regulations.