New O.T. Rules Hinder 21st Century Economy

By Liya Palagashvili of Mercatus.

"Sen. Elizabeth Warren, D-Mass., recently released a report that provides a number of narratives from individuals, mostly in retail, about their experiences working long hours without overtime wages. I commend Sen. Warren for supplying this report and giving us perspective about these issues that exist mostly in retail.

Yet the Department of Labor’s new overtime regulations may not provide an appropriate answer to the senator’s anecdotes.

The new federal overtime regulations mandate that employers track the hours worked by their personnel and pay them time-and-a-half for every hour worked over 40 hours per week. There are a number of exemptions to this regulation, and one of them is the employee’s salary.

Currently, employees making more than $23,660 a year are exempt from overtime regulations. A new DOL rule increases that threshold to $47,476, such that all employees in this salary range, regardless of the industry – unless, that is, specific roles and industries become exempt – will now have to keep track of their hours and be paid overtime wages when they work beyond 40 hours per week.

The problem with this regulation is that the DOL didn’t analyze how it will impact various U.S. industries. It noticed one problem in retail (specifically with shift managers) and assumed this is a problem for every industry. The DOL made no effort to understand how the nature of work may be different in tech startups or higher education than in your typical manufacturing company or retail store.

The DOL made no effort to understand that, in some industries and for some roles, it doesn’t make any sense to pay by the hour anymore. Forcing employers to reclassify millions of workers from salary to hourly drags the nature of our 21st century jobs back into the 20th century.

Why were the stories of young entrepreneurs not included in Sen. Warren’s or the DOL’s reports? Most startups don’t have a strong revenue stream, and some are even prerevenue for the first few years. Their margins are very tight, and that’s one of the reasons they pay employees in equity instead of cash wages. Adding even minuscule costs to their operations will hamper them early on.

But if the senator or the DOL had surveyed the tech community, they wouldn’t receive stories similar to what they found in retail regarding abuse of employees. Individuals working at tech startups and nonprofits are working there to advance a vision they believe in. For many roles in tech startups, the model of paying “by the hour” is outdated and oversimplified.

The DOL analysis didn’t consider how these overtime regulations would impact other factors of jobs in an information economy, either. Its analysis looks backward. Will employers limit telecommuting if workers are reclassified into hourly, and their work must now be tracked? If employees check email outside of business hours, does that count as work? The DOL needs to analyze how this regulation will impact today’s world in light of factors that many genuinely care about (e.g., telecommuting, worker flexibility).

The truth is, there is a solution out there that would help vulnerable individuals and not also punish small businesses, nonprofits, institutions of higher education, young entrepreneurs and tech startups, among many other groups. But in order to find that solution, we need to have an open and thorough discussion about both the costs and benefits of this policy and the people it will effect.

What would be better for society is if we moved beyond selective anecdotes – which may be atypical of current and future labor markets – and consider how our economy is evolving, based on more comprehensive evidence. Before we regulate, we should understand what it is that we are regulating."