The Economic Effects of Canceling Scheduled Changes to Overtime Regulations

The federal Fair Labor Standards Act of 1938 (FLSA) requires employers to provide certain workers with overtime pay when they work more than 40 hours in a week. That overtime pay must be at least 150 percent of the worker’s usual hourly wage. The Department of Labor has issued a rule—set to take effect on December 1, 2016—that substantially raises the salary thresholds below which salaried workers are automatically eligible for overtime pay. By CBO’s estimate, the new rule extends the FLSA’s overtime requirements to an additional 3.9 million workers (about 3 percent of all workers in the United States). Of those additional workers, about 900,000 regularly or occasionally work overtime and will therefore earn more (or work less) because of the changes.

The changes’ potential economic impact has raised concerns among policymakers. In this report, CBO analyzes how canceling the changes before they come into force would affect employers, employees, and family income in the United States through 2022. CBO finds that canceling the changes would reduce employers’ payroll and compliance costs and increase profits. The cancellation would also decrease employees’ pay, but it would increase real family income—that is, income adjusted to remove the effects of inflation—because an increase in firms’ profits and a decrease in prices would more than offset the reduction in some workers’ earnings.

The estimated effects of canceling the scheduled changes to overtime regulations are close to, but not equivalent to, the effects of the changes themselves with the signs reversed. Employers have already incurred some compliance costs, including some of the costs of familiarizing themselves with and adjusting to the scheduled changes, and would not be able to recover those costs if the changes were canceled.

What Policy Option Did CBO Analyze?

The option examined in this report would prohibit the implementation of the Department of Labor’s scheduled changes to overtime regulations. Those changes will affect the annual salary thresholds that, along with employees’ duties, determine whether employers are required to provide salaried workers with overtime pay. There are two such thresholds under the FLSA. With few exceptions, workers whose salaries are below the lower threshold must be provided with overtime pay when they work more than 40 hours in a week. Of workers whose salaries are above that threshold, those who perform executive, administrative, or professional (EAP) duties are not entitled to overtime pay, though other workers at that salary level retain the entitlement. For workers whose salary is above the higher threshold, the definition of EAP duties is broader, allowing fewer of those workers to qualify for mandatory overtime pay as non-EAP workers.

The scheduled changes—which, for the sake of simplicity, this report refers to as part of current law—will raise the two thresholds to about $47,500 and $134,000, respectively, on December 1, 2016. The changes will also, for the first time, require the thresholds to be adjusted to reflect economywide changes in earnings. The adjustment will happen every three years, starting in 2020.

In canceling the scheduled changes, the option examined here would restore the overtime regulations modified by the Labor Department’s rule, as if that rule had never been issued. Canceling the changes would reduce the salary thresholds to their present levels—about $23,700 and $100,000—and those thresholds would not be automatically adjusted for changes in earnings. For this analysis, CBO assumed that the legislation canceling the changes would be enacted and be effective by November 30, 2016.

What Effects Would the Option Have on Employers?

The option would have a larger effect on private-sector employers than on government employers at the federal, state, or local level. For private-sector employers, canceling the scheduled changes would lead to lower costs and higher revenues and therefore to greater profits. Specifically, CBO estimates the following effects (which are expressed in 2015 dollars):

• The option would reduce the payroll costs of private-sector employers by $40 million in December 2016 and by $470 million in 2017 (see table below). The reduction would be smaller in 2018 and 2019 but larger again in 2020, when the first adjustments to the thresholds are scheduled to occur under the Labor Department’s rule. Payroll costs would fall because workers would receive less overtime pay than under current law, though employers’ expanded use of overtime hours would partially offset that cost reduction.
• The option would also gradually increase private-sector employers’ use of capital services—the services generated by the nation’s stock of equipment, structures, intellectual property products, inventories, and land. Capital costs would increase by a negligible amount in December 2016, by $30 million in 2017, and by increasing amounts in the following few years.
• The option would increase the revenues of private-sector employers by $110 million in December 2016, by $860 million in 2017, and by smaller amounts in subsequent years—because of the increased use of capital services and because workers who will manage compliance under current law would instead be deployed to activities that generated revenues, in CBO’s assessment. As an example, consider a manager whose duties under current law will involve becoming familiar with the new overtime rules; without those rule changes, that manager could devote more attention to production or sales, for instance. The employer incurs the same payroll costs in the two instances, but in the second, the manager is generating revenues for the firm.
• On net, the lower costs and higher revenues would increase profits for private-sector employers by $150 million in late 2016 and by $1.3 billion in 2017. That change in profits includes the effects of both a reduction in compliance costs and a reduction in prices, as competition would lead employers to pass on some of the cost savings and revenue gains to consumers in the form of lower prices. The increase in profits would be smaller in each of the following several years, with an uptick in 2020.

The federal government would experience very little change in payroll costs in the years examined here. That is because overtime pay for most federal employees is not governed by the Department of Labor’s regulations.

Canceling the scheduled changes would have a negligible effect on state and local governments’ payroll costs in late 2016 and would reduce those costs by about $30 million in 2017, CBO estimates. The reduction would be between about $20 million and $30 million in each year between 2018 and 2022. Those lower costs would stem from the lower cost of each hour of overtime, partially offset by an increase in overtime hours.

There would be additional reductions in costs for state and local governments. In particular, $120 million in reduced costs for state and local governments would result in 2017 from a reduction in the cost of workers ho will manage compliance with the new overtime regulations under current law. Unlike their private-sector counterparts, those managers would not be redeployed to activities that generated revenue.

What Effects Would the Option Have on Employees?

Most employees would see no change in their overtime eligibility if the scheduled changes were canceled. In 2017, about 3.9 million salaried workers who will become eligible for overtime pay under the new rule would not be entitled to such pay under the option. About 80 percent of those workers are employed by for-profit employers in the private sector; about 10 percent work in the nonprofit sector; about 10 percent work for state or local governments; and less than one-half of one percent work for the federal government. About 900,000 of the 3.9 million workers regularly or occasionally work overtime and thus would have their overtime pay affected by the option in 2017.

On average, those 900,000 workers would work more hours and have lower earnings than they will under the scheduled changes. Specifically, the average employee in that group would work about 20 hours (or 1 percent) more in 2017 and would earn about $650 (or 2 percent) less in 2017. The option would reduce total earnings in the economy by $50 million in December 2016 and by $510 million in 2017, CBO estimates. The change in earnings would be smaller in 2018 and 2019 but would rise again to $500 million in 2020, when the scheduled adjustment to the salary thresholds would not take place.

The option would not significantly change total employment—that is, the total number of jobs—in any year of the 2016–2022 period. The increased hours of some workers (which would tend to decrease total employment) would be offset by increased output (which would tend to increase total employment).

What Effects Would the Option Have on Family Income?

If legislation canceled the new overtime rule, total real family income would be higher than it will be under current law—by about $260 million in late 2016, $2.1 billion in 2017, and $1 billion to $1.7 billion in later years. Those are increases of about one-hundredth of one percent. Real family income would fall for a small number of families because of the loss of overtime pay; rise for families with business income because of the increase in profits; and rise slightly for all families considered together because of the slight reduction in prices. Most of the increased income would accrue to families in the top fifth of the family income distribution, but average real income would increase for families in each fifth in most years.