THE EXEMPTION THRESHOLD
The measure the DOL has selected for this increase—a percentile of full-time southern salaries—is fundamentally arbitrary. In real (inflation-adjusted) terms, the proposed threshold ($1,158 per week) is 28% higher than the 1975 “long test” value when it was set, 40% higher than the current threshold when it was set, and only 3% below the level set in the DOL’s 2016 overtime regulation, which was invalidated by the courts. The DOL estimates that 3.4 million workers would be affected by the proposed adjustment to the EAP threshold. However, this estimate is premised on the DOL’s poorly grounded assumptions regarding the share of salaried white-collar workers who pass the duties test. If, as we suspect, the connection between salaried status and overtime exemption status is tighter than the DOL assumes, the number of affected workers could be up to approximately 7.2 million.
COSTS AND CONSEQUENCES
The DOL estimates that the 3.4 million workers that it estimates would be affected by the new rule would see their pay rise by $6 per week on average (0.6%) as a result of the proposed regulation. This represents an annualized economy-wide payroll cost of $1.3 billion. Additional non-payroll costs such as regulatory familiarization, adjustment, and managerial time bring the DOL’s total estimated annualized cost of the regulation to $2.0 billion. The DOL also identifies six additional unquantified costs of the proposed regulation and three unquantified benefits.
The DOL proposes to automatically update the EAP exemption threshold every three years following the implementation of the new threshold in 2024. However, the DOL’s proposed method for automatically updating the exemption threshold suffers from the same problem as its analysis of the costs of the proposed rule: a failure to model newly nonexempt affected workers losing their salaried status. Because the measure that the DOL has selected to adjust the exemption threshold (the 35th percentile of wages for full-time salaried Southern workers) is itself sensitive to which workers are paid salaried and which are paid hourly, this would result in a feedback effect where the exemption threshold is ratcheted ever higher as more workers below the new thresholds lose their salaried status.
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The experts behind the research
Our economic consulting team are world leaders in quantitative economic analysis, working with clients around the globe and across sectors to build models, forecast markets and evaluate interventions using state-of-the art techniques. Lead consultants on this project were:
Senior Economist, Economic Impact
Lead Economist, Economic Impact
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