Overtime-Eligible Does Not Mean Higher Earnings

Click here for An Overview of the DOL's White-Collar Exemption Notice of Proposed Rulemaking.

The Department of Labor claims that the increased salary test level will “give employees higher earnings in the form of transfers of income from employers to employees,” but that assertion is inconsistent with economic reasoning.  Even the economic studies cited in the NPRM cast doubt on that assumption. 

Economic reasoning holds that earnings are generally determined by market forces, including the bargaining power of employees and employers, and not by the timing or method of compensation.  There is no reason to expect hourly employees to systematically earn higher compensation compared to employees in the same occupation and local labor market who are paid a salary.  As a result, although the proposed salary threshold will certainly result in some employees being converted from salaried to hourly, non-exempt status, there is nothing about reclassification that requires or even suggests that their pay will be increased.  Instead, the most likely scenario is that employers will set the hourly rate such that paying the hourly rate for all work hours, plus the overtime premium for hours over 40 in the week, will result in total compensation per week that is the same as the previous weekly salary.  While those employees will now receive overtime pay, their total compensation received will likely remain the same.

Contradictory to that economic reasoning, the Department asserts that the new salary threshold will result in increased earnings.  As justification, they cite two dated economic studies, by Trejo (1991) and Barkume (2010), neither of which analyzes earnings of white-collar workers before and after a change to the salary threshold.

The Trejo study specifically excluded white-collar occupations and used data from the 1970’s to compare the earnings of blue-collar workers who were covered and not covered by the FLSA.  Trejo found a significantly lower hourly wage in covered jobs and no significant difference in the weekly earnings of covered and uncovered workers, holding constant other factors.  His article states that his results show “overtime pay regulation does not significantly increase weekly earnings.”

Barkume (2010) updated the Trejo study and compared pay in jobs with and without overtime provisions.  Even with that imperfect comparison, he found little evidence of an increase in earnings due to FLSA overtime regulations.

The disconnect between Barkume’s study (and by extension, Trejo’s) and the Department’s conclusion is highlighted by Barkume’s note that the 2004 change in the white-collar salary threshold will provide an opportunity for a future study of the impact of the FLSA overtime regulation.  Instead of relying on such an analysis, the Department cites these two studies, both of which cast doubt on the assertion that a higher salary level threshold will increase the earnings of impacted employees.