Regulatory Reform

Lawsuits Filed to Challenge Department of Labor’s New Overtime Rule

The U.S. Department of Labor (DOL) is facing fresh challenges to its new rule regarding overtime pay. This week, two separate lawsuits were filed to challenge the new rule that will impact more than 4 million people, effective December 1, 2016. Currently, employers must pay overtime (time-and-a-half) to employees that earn less than $23,660 per year. The new rule would more than double this exemption threshold to $47,476 per year, meaning that employers must pay overtime to any salaried employee making below that amount while effectively demoting these employees to hourly workers. Additionally, the new overtime rule from DOL would ensure the exemption threshold ratchets up every three years by indexing it to salary growth in the lowest income region in the nation.

The rule itself has been heavily criticized by economists and small business organizations who point out the likely negative economic effects of such an unprecedented change. The likely reaction of employers would be to reduce the base pay of employees so the added costs of paying for overtime could be offset – resulting in about the same take-home pay for employees. This stands in direct contrast to the DOL’s claim that the new rule will “put more money in people’s pockets” by forcing employers to pay more employees for overtime. Even Jared Bernstein, former chief economic advisor to Vice President Joe Biden, notes that “the costs of increased (overtime) coverage would ultimately be borne by workers as employers set base wages taking expected overtime pay into account.”

Another likely response from employers would be to reduce the number hours worked by current employees to avoid being forced to pay overtime, hiring new workers instead. This is the stated objective of the DOL’s new overtime rules but is in contrast with their claims that the rule will increase the take-home pay of employees. These competing objectives only serve to highlight the DOL’s bold doublespeak on the issue. As the authors of an academic study examining the proposed rule note, “empirical studies reveal little evidence that overtime-pay regulations result in greater pay or more employment.”

In addition to the economic evidence that the new rule would be ineffective, the burden for businesses to comply with such a change would be substantial. Forcing salaried employees to log their hours to ensure compliance with the new rule means increased compliance costs for employers and decreased flexibility for employees. The National Federation of Independent Businesses also notes the rule could negatively affect morale by decreasing the flexibility of salaried workers and signaling to many mid-level managers that there are fewer opportunities for growth.

Many questioned whether the Department of Labor even had the authority to enact such sweeping changes. In fact, as noted by National Review, back in 2004 the DOL was certain that changes of this kind must come about through an act of Congress. However, this conclusion was clearly not shared by the Obama administration. But these questions have now boiled over as two lawsuits have been filed to challenge the rule.

One lawsuit is led by Texas Attorney General Ken Paxton and Nevada Attorney General Adam Laxalt. They are joined by 19 other states in their assertion that the Department of Labor violated the Constitution by exceeding its authority in crafting the rule. The attorneys general argue that federal law does not allow the rule to go into effect since the exemption threshold and other rules regarding overtime pay were outlined by Congress in the Fair Labor Standards Act. They additionally claim the three-year ratcheting up of the exemption is in violation of the law since the mechanism would increase the threshold automatically, without going through the rule-making process required by law. Furthermore, the lawsuit contends the new rule is a back-door way to involve the federal government in states’ budgets because the overtime rule would affect public employees as well as private ones.

The other lawsuit challenging the rule comes from a coalition of more than 50 business organizations and is being led by the National Federation of Independent Businesses and the U.S. Chamber of Commerce. Many of the objections regarding the constitutionality of the rule are similar in both lawsuits, both filed in the U.S. District Court for the Eastern District of Texas.

Secretary of Labor Thomas Perez dismisses the lawsuits as nothing more than “obstructionist tactics” to prevent the administration from ensuring “fair pay” for workers when they work extra hours. With such drastic consequences for small businesses, state budgets and the separation of powers, obstructing the new overtime rule might not be such a bad idea.

In Depth: Regulatory Reform

In his first inaugural address, Thomas Jefferson said that “the sum of good government” was one “which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry.” Sadly, governments – both federal and state – have ignored this axiom and…

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