Another day, another labor market intervention! 

Recently, the Biden administration has announced new rules regarding overtime pay and salaried employees. Generally, salaried employees are paid a flat rate, not paid by the hour, and as such don’t get traditional overtime pay. But legislators have decided that lower-paid salaried workers should also get overtime pay. This itself isn’t new – what is new is that the Biden administration is increasing the salary cap for this rule to apply. According to the Labor Department, starting July 1st, salaried employees making less than $43,888 per year will now get overtime pay, and by 2025 that will increase to $58,656. 

There are a number of concerns one might raise. This rule will make less experienced workers more expensive to hire than they were before. Someone you might have been willing to hire in an entry level position for a $40,000 per year salary may suddenly become a less attractive prospect – leading you to favor hiring someone with a more established work history and better skill set. Anecdotally, I frequently hear people complain about how hard it is to find even entry-level jobs, and it’s not helpful to such people to pass laws that make it even more expensive to hire someone for an entry-level position. But perhaps this will be offset by including fewer benefits and perks, instead of hiring fewer entry-level workers. There are multiple margins that could be adjusted. 

But what struck me about the Labor Department’s announcement was the following line:

“This rule will restore the promise to workers that if you work more than 40 hours in a week, you should be paid more for that time,” said Acting Secretary Julie Su.

I found this very confusing. I have worked salaried positions that were below the minimum caps currently in place. There were definitely times I worked more than 40 hours per week as well. Yet I didn’t demand, or expect, overtime pay, because I had already agreed to a set salary as part of the process of negotiating for the job. If someone then said to me “Oh no! You put in more than 40 hours a week but didn’t get additional overtime pay for it! A promise has been violated!” I would have just stared at them and wondered what on earth they were talking about. I was being paid the wages I was promised – there was never any agreement between me and my employer that workweeks extending beyond 40 hours would yield extra pay. So what promise was being violated? Who made that promise? 

Secretary Su is talking about restoring a promise that was never made by anyone actually involved. If I had started receiving payment below my negotiated salary, that would have been a violation of a promise. And that’s a role government can usefully serve – if my employer had promised me a particular salary in the employment agreement, but didn’t follow through, the government could appropriately take steps to restore the broken promise. But this new rule isn’t anything like that. This isn’t the government enforcing an existing promise (or contract) that had been made between two consenting parties. This is the government stepping in to a promise that’s being upheld as agreed, and forcefully breaking the promise after the fact. Secretary Su’s actions are better characterized by the words of Darth Vader in The Empire Strikes Back: “I am altering the deal. Pray I don’t alter it any further.”