Obama’s Overtime Rule Is Bad for Young Graduates

Good for thee, but not for me. That was the lesson when a network of progressive groups collectively known as U.S. Public Interest Research Group (PIRG) issued a statement saying that President Obama’s new overtime regulations would erode its efforts to “stand up to powerful special interest.”

“Doubling the minimum salary to $47,476 is especially unrealistic for non-profit, cause-oriented organizations,” the group writes. “Organizations like ours rely on small donations from individuals to pay the bills. We can’t expect those individuals to double the amount they donate. Rather, to cover higher staffing costs forced upon us under the rule, we will be forced to hire fewer staff and limit the hours those staff can work – all while the well-funded special interests that we’re up against will simply spend more.”

Notably, PIRG doesn’t want to repeal the rule, they just want it to not apply to non-profits. Utter hypocrisy aside, PIRG essentially makes the perfect economic case against the rule. They have a small budget, staffing is a big expense, and to increase the salary threshold under which workers qualify for overtime pay leaves them with a tough choice: pay workers more, but have fewer workers, or have more workers who earn less money.

But there is nothing unique to that dilemma for nonprofits. In fact, small businesses and even big businesses could actually feel more pain. After all, for-profit businesses must sell goods and services, which are priced in line with supply and demand, in order to survive. If labor costs go up, businesses are likely going to be forced to pass that cost on to consumers, many of whom may choose to forego the now-higher price.

So as demand for a product goes down, so too will the need for labor. Of course, this type of regulation also creates some perverse incentives to look for alternative forms of labor. For instance, I would expect this regulation to hasten many businesses’ investment in automation, just as I would expect that contract labor (part-and-parcel of the so-called gig economy) will continue to grow vis-a-vis employed labor. Those things are not necessarily bad, but they are the antithesis of what President Obama was likely hoping for.

Perhaps most troubling, not all companies have consumers to pass costs onto. Startups, for instance, often rely on angel investors and other sources of investment capital in order to succeed. It can take months, and even years, before they have a profit margin capable of sustainably paying expenses, which is why they often turn to creative ways to pay their employees, like giving them an ownership stake in the fledgling company. Jon Hartley writes for Forbes:

In their early phases, many tech startups are pre-revenue which constrains their ability to pay employees as they build a vision and a product depending on their access to financing. Even after crossing the hurdle of introducing their product to market, startups often continue to operate on a weak revenue stream.

Many startups have margins that remain very small, and that is one of the reasons they pay employees in equity instead of cash wages.

The unhindered start-up model with flexible compensation options has played a substantial role in what has often enabled tech startups to take-off. Adding even miniscule costs to their operations could seriously impact the start-up model and unlike large companies which can afford large compliance departments, start-ups cannot easily pass on the cost of this regulation.

Unfortunately, this regulation was not made for the modern economy, where strict workdays and traditional pay structures are no longer the norm. Instead, it simply tweaks the hours limit of an 80-year-old law, one passed when the country was dominated by factories and manual labor.

The problem for workers is exemplified by an example. Take, for instance, a fresh-out-of-college business major who takes a job with a small consulting firm. He enjoys a relaxed workplace environment, one that allows him to work from home some days, leave early and catch up in the evenings on others, and rack up “comp days” during the busy months, which he can translate into longer vacations during the slower times.

Obama’s new rule will eliminate all of that. Businesses will need to track hours to make sure that they are complying with the rule, which could mean that working from home is no longer an option. It will also be illegal to give extra time off for working long days, and instead businesses will have to pay him overtime. Does that necessarily mean he’ll make more? No. What’s more likely is that his employer will closely monitor his hours to make sure he doesn’t work over 40 hours in a week, or will likely adjust his total pay to take into account the new projected overtime costs.

I doubt you’ll find too many new graduates cheering the fact that they’ll be entering a more rigid and regimented labor market, where salaried leadership opportunities are replaced with hourly grunt labor, and startups struggle to pay their bills. Don’t believe us? Just ask PIRG.