Eakinomics: The Trump Overtime Rule

The Trump Administration continues to march through the Obama regulatory legacy, rule by rule. In the latest action, it replaced the 2017 Obama Department of Labor (DOL) overtime rule with a new set of standards for those who are to get overtime pay.

Recall that under the Fair Labor Standards Act employers are required to pay their employees overtime for those who work greater than 40 hours in a week. The overtime wage is 1.5 times regular pay; for an employer to exempt a worker from overtime, the worker must meet three tests: the worker must be salaried (“salary basis test”), that salary must meet a minimum level (“salary level test”), and the duties should be mainly executive, administrative, or professional duties (“duties test”).

As outlined by AAF’s Isabel Soto, the Trump Administration issued a new overtime rule that changes the salary level requirement for both standard exemptions as well as highly compensated employees (HCE). The DOL estimates that 1.3 million workers (under 1 percent of the total labor force) will be newly eligible for overtime pay because the minimum weekly pay that exempts salaried workers rises from $455 a week ($23,660 annually) to $684 a week ($35,568 annually). Also, the salary requirement of HCEs is the 80^th percentile of the distribution earning of the nation’s full-time salaried workers ($107,432 annually).

1.3 million workers are a lot fewer than the 4.2 million workers that the Obama-era rule claimed to have helped. But a closer look at the Obama-era rule showed that average weekly earnings among those workers would have only grown by $5.48 because only 825,000 of those workers regularly work more than 40 hours per week. It’s all moot, however, because in 2017, the rule was invalidated because it raised the salary threshold by so much that it effectively made the duties requirements irrelevant and thus was unlawful.

Even with a less expansive rule, a basic problem remains: Issuing the rule does not change the revenue of any company in the economy. Any additional overtime must, then, come from adjustments that firms make to the hours of employees (e.g., less overtime), the number of employees, capital expenditure plans, and so forth. No overtime rule is entirely benign or immediately obvious in its implications.