Last week, the Department of Labor’s Wage & Hour Division (WHD) finally announced its long-promised proposal to amend the Fair Labor Standards Act (FLSA) Regulations and, in particular, those governing the “white collar” exemption for executive, administrative, and professional employees. For our comprehensive discussion of the changes in the DOL’s Notice of Proposed Rulemaking (NPRM), see our previous coverage on What Changed, What Didn't, What's Next for Employers. Today, I want to dig a bit deeper into the DOL’s rationale set forth in the 285+ pages of preamble, and in particular one place where the DOL’s analysis left me scratching my head. The DOL concludes that the new FLSA regulations mean all of your soon-to-be-formerly exempt employees will receive a big raise—to the tune of $1.5 billion in the first year alone. Surprised? I thought so.

As you know by now, the proposed rule more than doubles the salary level for exempt workers to $970 per week ($50,440 per year). In a conference call with reporters on Tuesday, Secretary Perez said that the Department estimates that the new salary level in the regulations will result in a $1.5 billion raise for workers in the first year. The DOL explains this conclusion in the NPRM in a section where it discusses “transfers due to the overtime pay provision.” The DOL believes that “[t]he proposed rule will also transfer income to affected [white collar exempt] workers working in excess of 40 hours per week through payment of overtime to workers earning between the current and proposed salary levels.” You read that correctly: the DOL has concluded that employers will transfer $1.5 billion in wage increases in the first year, increases that the DOL assumes employers never gave because there was no such regulation. No fancy statistical analysis is required to conclude that this seems implausible on its face, and would be an exceedingly unlikely employer response to the regulations. If this is obvious to employers I have talked to and obvious to me, how did the DOL justify that conclusion? The NPRM includes the Department’s assumptions about five potential employer responses to the salary level increase:

  1. paying the required overtime premium to affected workers for the same number of overtime hours at the same implicit regular rate of pay;
  2. reducing the regular rate of pay for workers working overtime;
  3. eliminating overtime hours and potentially transferring some of these hours to other workers;
  4. increasing workers’ salary to the proposed salary level; or
  5. using some combination of these responses.

All of the DOL’s options share a common thread: an assumption that employers will increase pay in response to the regulation or, at worst keep it the same (Option 2), perhaps while spreading some of the additional overtime pay around to other workers. Again, I don’t think I am going out on a limb when I say that employers have other options than big spikes in compensation costs. To that list, I would add at least these three, more logical responses:

  1. eliminate workers’ positions entirely (part-time exempt managers, for example);
  2. convert salaried workers to hourly pay; or
  3. adjust all hours and staffing levels to keep overall compensation consistent

These have a common theme, too: employers do not increase wages. To me, this outcome seems more likely because employers generally make wage adjustments in response to business needs and labor market conditions, not the shuffling of regulatory categories. While certainly some employers will ignore business needs and/or labor market conditions, whether out of loyalty or altruism, others will not. There’s nothing illegal or immoral about that.

Accordingly, the DOL’s regulation is likely to leave employees individually worse off, never realizing the assumed $1.5 billion windfall. The rosy picture described in the NPRM overlooks the fact that unlike minimum wage laws, neither federal nor state laws mandate that employers pay employees any particular higher wage. Optimistically, the net effect may be zero in the aggregate, but employees who lose salaried status, hours, pay, or all three, won’t care about any such aggregate effects.

To get the full picture, let’s put some numbers to it. Take a manager who averages 50 hours per week and receives a $500 weekly salary. Under the new rules, the FLSA would require the employer to pay the manager overtime for the 10 hours over 40 in a workweek. Voila—more pay for the worker, right? That’s what the DOL assumes will happen in the NPRM. However, the employer could—and likely would—reduce the salary to roughly $417, so that the employee receives essentially the same gross pay as before, even with the overtime premium. The DOL’s presumed transfer effect disappears, and this is a best case scenario. The 50 hours is an average. In some weeks, the employee might work more or fewer hours. If the manager does not work at least 10 hours of overtime, he or she would end up earning less. Under the new DOL regime, to maintain income equal to the former salary, our hypothetical manager now must work 40 hours plus 10 hours of overtime every week.

Furthermore, the added administrative burden of tracking salaried, non-exempt workers’ hours and pay is likely to lead many employers to simply convert salaried, formerly exempt workers to hourly, non-exempt workers. This outcome is no better for the manager. The manager now punches a time clock and receives pay for only the actual hours he or she works each week. Coming to work a few minutes late or leaving a few minutes early, stepping out to run errands, picking up a sick child, going to the doctor, or being away from the workplace never impacted the manager’s income before the new rule. Now, as an hourly worker, those absences would require use of accrued benefit time or the loss of earnings.

In passing, the DOL’s NPRM recognizes this issue, too. For instance, on pages 202-03, the DOL acknowledges in a caveat that one result of the rule will be “increased time off for a group of workers.” Without any hint of irony, the DOL admits that the “total benefit” of this extra time off is “likely an overestimate” because some workers do not want to work fewer hours and would be unwilling to trade some of their income for more time off. Once again, the DOL ignores the fact that this may not be the employee’s choice. Elsewhere, on page 195, the DOL admits that while the NPRM quantifies the assumption that employers will increase employees’ incomes, the DOL did not quantify some of the costs, such as workers “[c]onverted to hourly status from salaried status” and “[r]educed earnings for some workers.”

The DOL’s rule in practice is unlikely to result in employers handing out $1.5 billion per year in raises to employees, as the NPRM assumes. This number makes for a good sound bite, but the rule functionally incentivizes employers to remove the flexibility of a guaranteed weekly salary and to replace it with the uncertainty of an hourly wage. Even if an employer takes on the administrative burden of tracking salaried, non-exempt workers, the aggregate effect will be little or no additional take home pay for the employee, and certainly not an additional $1.5 billion per year. 

The DOL and the Obama administration are marketing this rule as a boon for employees that (inexplicably) requires employers to give employees a raise, either through more overtime or higher salaries. Helping a broadly defined middle class is a noble and admirable goal, and the rule has some merit, even if it has no economic effects. Whatever positive effects the rule will have, I would not count on substantial wage increases being among them. Just like there’s no pot of gold at the end of the rainbow, you won’t find $1.5 billion in wages at the end of this rule making process, either.