Could more overtime pay be bad for employees? by Anne Fisher @FortuneMagazine July 1, 2015, 1:14 PM EST E-mail Tweet Facebook Linkedin Share icons If President Obama gets his way, starting in 2016, companies will have to start paying overtime to about 5 million more employees. Under the plan, people with salaries up to $50,440 would be eligible for time-and-a-half for any hours they work beyond 40 in a given week — time they are now, in many cases, putting in for free. That’s a big jump from the current overtime cutoff of $23,660, and (no surprise) the usual suspects are sounding off for and against it. An array of fair-pay advocates and labor groups, including the American Federation of Teachers, believes the change is long overdue. They contend that the U.S. workforce’s huge productivity gains in recent years have come at the expense of the lowest paid workers, since a salary at the current $23,660 cutoff puts a family of four below the poverty level. At the same time, such a huge increase in labor costs naturally makes employers cringe. The National Retail Federation, with researchers from Oxford Economics, has published a study that paints a dark, dystopian picture of how the new rules would play out, but with a twist. The worst impact, the study says, would be not on companies or their shareholders, but on employees. How so? Raising the overtime threshold from its present $455 per week to the level the government is proposing would mean employers would have to pay overtime to over 2 million more people in the retail and restaurant industries alone, at a cost of about $9 billion a year, the study says. So, assuming companies pass none of that along to their customers, they’ll take the overtime hit by cutting workers’ pay in ways that will keep overall compensation budgets the same as they are now. The NRF sees three ways to do that. First, companies would simply lower hourly pay rates across the board, so that everyone earning below $970 per week would make less than they make now. Employers could also avoid paying overtime by cutting some workers’ hours to fewer than 40 per week, and bringing in new, part-time workers to pick up the slack. In other words, the overtime paid to previously exempt employees would come straight out of the pockets of the employees who are under them. Leaving aside the obvious consequence (more people would be worse off than they already are), it’s hard to imagine a better way to make people resent their bosses. There’s more. Companies could control labor costs by cutting everyone’s benefits (and bonuses, if they make any) to raise newly non-exempt supervisors’ and managers’ salaries above the new overtime threshold (to, one imagines, something like $50,441 per year). Or employers could do away with some lower-level professional and managerial jobs altogether and, in jobs with back-office duties, replace those people with automation. “The net result of these changes would be an accelerated ‘hollowing out’ of low-level administrative and professional functions,” the report says. “Workplaces would become more hierarchical and inequality would increase. Lower-level employees … would find it harder to rise into the professional ranks as the number of midlevel salaried positions contracts.” Sounds pretty awful, doesn’t it? Luckily, the NRF’s Dickensian vision of the future won’t necessarily happen. For one thing, the overtime threshold has been raised twice in the past 40 years and, after the initial moans of protest from the business community, the increase both times was offset by economic growth. There’s no reason to believe this time is different. Employers and anyone else who wants to argue otherwise will have a chance to say so. The Department of Labor won’t issue a new overtime rule until next year, after reviewing comments from the public that may influence regulators in unexpected ways. Moreover, the assumption that businesses won’t pass their higher labor costs on to consumers is dubious at best — and that may be okay. Consider, if you will, a view that runs counter to the NRF’s. Last fall, national restaurant workers’ organization ROC United was trying to persuade Olive Garden, the biggest restaurant chain in the U.S., to raise its pay from the “tipped minimum wage” of $2.13 per hour to a “living wage” of $15 per hour, gradually over five years. For most companies, that kind of increase would be a far bigger deal than a higher overtime threshold. Yet a detailed analysis showed that the resulting hit to the company’s revenues would be about 2% per year and that, even if Olive Garden passed the entire cost on to diners, the effect on menu prices would be tiny. Customers would pay 10 cents more for a plate of tortellini al forno, for instance. The average Olive Garden check would increase from its then-current $16.75 to $17.10. Given that the proposed higher overtime cutoff could put more cash in about 5 million consumers’ wallets, shoppers and restaurant customers may be willing to spend a few extra cents here and there. But the larger economic and cultural context matters, too. As certain politicians have noticed, voters care about income inequality, and most Americans favor more overtime pay. If nothing else, resisting the populist tide on this issue could be a big public relations headache for companies. It’s tough to tell, say, a restaurant supervisor making $24,000 a year working 60 hours a week that she shouldn’t get overtime when U.S. companies are sitting on trillions in cash—and paying their CEOs more than 300 times what the average employee takes home.