Big Business and the Overtime Rule: Irrational Complaints

Dean Baker

Business lobbyists have been up in arms in recent months over what they claim is President Barack Obama’s anti-business turn. They point to a number of policies and executive orders that they contend are anti-business.

Three of these policies have gotten the most attention:

* The first is a rule requiring overtime pay for salaried employees making less than $50,440 a year.

* The second is a rule requiring that financial advisers have a fiduciary responsibility towards their clients.

* The third is tightening up tax regulations so that it will be more difficult for a huge company like Pfizer to relocate to another country to avoid much of its U.S. tax liability.

In each case, the business lobbyists have complained that the new regulations will hurt business, costing jobs and leading to higher prices. In actuality, in each case, Obama is simply implementing commonsense reforms that should have been in place long ago.

This is most clear with the overtime rule. This is a question of requiring employers to pay time and a half to workers who put in more than 40 hours a week. This is part of the Fair Labor Standards Act that went into effect in 1938.

While the standard for overtime pay is straightforward for hourly workers, it is less clear with salaried workers. The issue is that salaried workers tend to have more authority and control over their time.

Furthermore, it is often difficult to determine exactly how many hours they spend on the job. Under the law, supervisory employees are therefore exempted from the requirement for overtime pay.

However, if the law exempted all salaried employees from the requirement, companies could just switch everyone from hourly pay to being salaried and thereby avoid ever having to pay overtime.

To prevent this gaming, the Labor Department has a salary floor, which essentially assumes that a low-paid employee is not really in a management position.

This is a perfectly reasonable policy, but this floor has not kept pace with inflation. Until the new Obama rule, it was set at just $23,700 a year, less than $12 an hour.

The Obama rule essentially moves that floor from a 1970s level to one appropriate today, in effect saying someone earning less than $25 an hour is not really management.

The other two changes are in the same vein. Currently many financial advisers are paid a commission to get their clients into certain investments. Most people are not terribly sophisticated on financial matters and are likely to trust the advice from a financial adviser without asking many questions.

The fiduciary rule simply says that an adviser cannot be paid a commission for putting clients into a specific investment. The adviser must act in what she understands to be the best interest of the client. Note that this does not mean that the advice cannot be mistaken. Mistakes happen. The point is to prevent corruption and deception.

The last point is straightforward. We have a corporate tax code with the expectation that U.S. companies will be subject to that tax code.

But many of our largest companies are now treating paying taxes as optional. The latest fad has seen them merge with smaller companies located in lower-tax countries abroad.

The firms can then have most of their income appear in that country and avoid paying U.S. income taxes on it. Obama put in place new rules that make it much harder to pull off this little trick.

In all these cases, Obama is proposing regulations that serve important public goals at minimal cost to business. It’s difficult to look at the evidence and take the business complaints seriously.