Who is Actually Looking Out for American Workers? Changes to Rules Regarding “White Collar” Exemptions to Overtime Pay

Written By:  Arnie J Olsen      11/28/19

Trump touts deregulation “savings” of $535 million!  2.7 million American workers pay the bill!

We all hear soundbites on the various things Donald Trump and Republicans have either already done since winning the 2016 election, but rarely do you hear what these rhetoric laden statements actually mean for the American people, and with all of the daily coverage of the bigger news stories, you may not even be aware some of these things are happening, much less get a factual account of what they mean to you and others.

I will preface my comments here and with all subsequent reports like this by saying that I am not going to try to hide my personal opinions on these different subjects, but I am going to back those opinions up with actual facts.  You may not agree with my opinions or conclusions (as is of course, that is your right), but that does not change the facts I am presenting.  They are all researched, data driven to the extent possible, and unless you want to call things like the rules of mathematics fake, there’s nothing subjective about what I am presenting.  The only thing left is for you to decide how you feel about it.

Back in 2004, the U.S Department of Labor established a rule that established a minimum salary level for “salaried” employees to be considered exempt from receiving overtime pay when working more than 40 hours in a week.  The policy, under George W. Bush, set the minimum level at $455 per week, or $23,660 annually, which was slightly above the 20th percentile of salaries in 2002.  What this meant for workers was that an employer could choose to pay you a salary, instead of hourly, and as long as you earned more than $23,660, they could classify you as “exempt” meaning you would not receive any overtime pay for time worked beyond 40 hours, nor any additional compensation at all, actually.  In other words, if you are working in the accounting department of a company and receive a salary instead of hourly pay, for example, and one week a year, you are required to work an extra 10 hours to handle the month end reporting for the company, and one entire weekend per year to handle inventory (say an extra 16 hours), you would not receive any compensation for these hours, provided you have a salary of more than $23,660.

Now, that may not seem like a big deal, but here is how the math works.  The average salary for an accounting clerk in the United States is $39,449 currently.  That is based on a standard 40 hour work week, so you are effectively being paid, $18.97 per hour.  With the additional time required as outlined in the example above, you are required to work an extra 136 hours per year, and will receive no compensation for this time at all, so even though your salary is based on 2,080 hours per year, when you add the extra 136 required hours on top of that, you are now working 2,216 hours, receiving the same $39,449 salary and only being paid an effective hourly rate of $17.80 per hour.

In 2016, the Department of Labor under Obama issued an updated rule for this scenario, where they raised the threshold to the 40th percentile of salaries in 2015, meaning the threshold was now set at $913 per week, or $47,476 per year.  As a second component of the new rule, this threshold was to be updated every three years to whatever the 40th percentile had become over that three year period so that the rule would remain current (unlike the 2004 rule that had no such mechanism for automatic updates), and remain fair to employees as inflation, cost of living and everything else continually increases.

This updated rule was challenged in Federal Court in 2016 by 55 different business groups, before it could take effect, and was ultimately struck down in 2017 by U.S. District Judge Amos Mazzant in the Eastern District of Texas because they claimed that the Department of Labor had exceeded its authority in doing so.  Without getting too deep into the weeds on the specifics of the opinion issued by Mazzant, there were two issues he felt were “too much”.

First, Judge Mazzant claimed the rule raised the threshold too high by taking it from the 20th percentile to the 40th percentile.  In my mind, I fail to see how there is any difference between the Department of Labor setting a threshold at the 20th percentile and the 40th percentile.  If they have the authority to set a threshold (which they clearly did based on the 2004 rule not being challenged), then the actual level they set it at seems to be irrelevant for this argument.

Second, the automatic escalator was blocked; with Judge Mazzant saying that this was untenable for businesses as it would lead to too high of increases.  I also cannot see how having an automatic adjustment is problematic since it is based directly on average wages in the United States, which are entirely controlled by employers.  If wages continue to go up, it is because they are being driven higher by the free market, need to adjust for inflation, and at the roughly the same rate that business revenue is increasing.  To not have an automatic adjustment mechanism means simply that the rule will always be outdated, and will require someone to be monitoring it, and to go through the whole process of changing it if they ever feel it is too far out of line with current wages.

With this second point, for example, had there been an automatic adjustment mechanism attached to the 2004 rule, the threshold would have been increased to $35,308 per year (still the 20th percentile) by the time this case was ruled upon.  That is a 49.2% increase, and while it is obvious why businesses would resist this, can you really argue that it would have been unfair?  I think quite the opposite…NOT increasing it is highly unfair to employees, as the company is most certainly increasing their sell prices by at least that much over the course of the 12 years between the original rule and the updated rule.

Following this ruling, it was up to the Department of Labor, under Trump appointment Alex Acosta, to appeal this ruling; however, they elected not to do so and just left this ruling to stand.  Instead of challenging the Court ruling, they have proposed a different modification to the rule (in March, 2019), with a return to the original 20th percentile (currently $679 per week or $35,308 per year), and foregoing the automatic adjustment mechanism all together.  This new Trump era rule was finalized on September 24, 2019 and is expected to be implemented as a “deregulatory action” Executive Order #13771 if signed by Trump, and would take effect on January 1, 2020.  It is being touted by the Trump Administration as “saving” $535 million compared to the 2016 Obama era rule.

Using the same example above of the Accounting Clerk, blocking the 2016 rule, in addition to reducing the effective hourly rate for their work by over a dollar an hour, it actually costs that employee $3,869.88 per year.  This is based on 136 hours of labor not being compensated for at all under the 2004 rule compared to paying those hours at 1.5 times the $18.97 per hour rate that $39,449 salary equates to.  Now, I will note that by just making the adjustment to a more current 20th percentile level, the Trump rule of 2019 will mean that this particular accounting clerk will now be covered, whereas they were not covered by the 2004 rule, however, that will only last for a very brief time, likely 2-3 years, because they have omitted the automatic adjustment that business groups opposed.  Also, anyone earning a salary between $35,308 ($16.98 per hour) and $47,476 ($22.83 per hour) will NOT be protected, as they would have been under the Obama rule.  These people will only be covered by a standards “test” when determining if an employee may be classified as “exempt”, but as a business owner who has dealt with this “test”, it is honestly an easily manipulated and circumvented series of rules that can often be avoided simply by playing with the wording of a written job description, whereas, the “White Collar” exemption rules provide a much more indisputable, clear cut protection for workers.  One of the objections in the Court ruling, as written by Judge Mazzant, was also that the more aggressive Obama era rule would effectively override the existing rules regarding Exempt classification.  In my opinion, this is hugely important, because it prevents employer manipulation and makes for clearer cut, unambiguous applications that ultimately protect employees.

If we apply the same example of 136 extra hours required that was used above, that results in a loss for employees in that salary range of between $3,463.92 and $4,658.00.

In terms of the number of employees, this Trump rule, with reduced requirement, will cover an additional 1.3 million workers, whereas the 2016 Obama rule would have covered an additional 4 million workers.

In other words, when Donald Trump is standing proudly at a podium and claiming how great it was that he “saved” $535 million by eliminating cumbersome Obama era regulations, you need to realize that every penny of that $535 million “savings” was achieved by taking it directly out of the pockets of roughly 2.7 million workers, at an average of $5,046.70 per worker, every one of whom falls squarely in what most people would define as the middle class.

One last thing, just as some food for thought, we constantly hear about the record budget deficit under the current administration, and this has an impact here too.  For the employer, spending that extra money on wages is a 100% tax deduction for the business, so there is no tax revenue going to the U.S. Treasury, and if the business were to retain it instead, it would increase the taxable net income of the business, so about $112 million would be paid as corporate income tax, HOWEVER, if that business owner does something else with that money, such as buy themselves a new, expensive “company” Mercedes to drive, that works the same under Federal tax code as wages, in terms of being a write off, so the Treasury gets nothing.  On the flipside, IF that money were actually paid out to employees, right off the bat, there is a Federal income tax collected of either 22% or 24% depending on which tax bracket the individual falls into, which means between $117.7 million and $128.4 million being paid into the Treasury, not to mention all of the other taxes collected when the remainder is most likely spent in the economy by those 2.7 million people.

Over the next 11+ months, as you are listening to campaign rhetoric from both sides, take the time to educate yourself, because how candidates spin the facts are often extremely misleading, more so now than ever, and in this case, the truth is clear.  One party was doing something for the benefit of the “middle class” and simultaneously, good for the economy and contributing to reducing the budget deficit, while the other, is touting a $535 million “savings” that comes straight out of the pockets of the American middle class, straight into the pockets of corporate America, and is just another entry into the rising budget deficit ledger.  As for me, I will be voting for the party that is working to benefit me and people like me…hardworking Americans…and not the people funding their campaigns or buying memberships at their golf clubs.

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