CBO inflates its estimates of employer compliance costs

CBO released a report on the economic impact of repealing the Department of Labor’s new overtime rule, which raises the salary level for exemption from $23,660 a year to $47,476, thereby making about 4 million employees newly eligible for overtime pay and strengthening the right to overtime pay for about 8.5 million more. CBO concludes that repealing the new rule would have no appreciable effect on employment, would cut the pay of about 900,000 salaried employees who would lose the right to be paid for overtime they actually work, and would increase employer profits.

CBO’s analysis differs in significant ways from the Department of Labor’s, which predicted much greater pay raises for newly eligible workers and much lower compliance costs for employers. CBO exaggerates the extent to which repealing the rule would increase employer profits because it inflates the compliance costs that employers would avoid if the rule were repealed.

1. Familiarization costs: 

The Congressional Budget Office admits that “There is considerable uncertainty about the size of these familiarization costs.” CBO assumes that only 3.9 million workers will be affected by the changed salary threshold but assumes that 7.5 million establishments will need to devote time to regulatory familiarization. Even assuming there is only one affected worker per establishment, that leaves 3.5 million establishments that require no familiarization. (Even this assumption is incorrect, given that large establishments such as Walmart superstores and manufacturing plants employ numerous affected employees.) That correction alone reduces the familiarization costs nearly in half to $135 million.

CBO says only 900,000 of the 3.9 million affected employees actually work overtime hours. CBO does not explain why employers have to become familiar with the rule if none of their employees ever works overtime. If CBO’s estimate of overtime hours is correct, fewer than 1 million establishments need to be familiar with the new overtime rule, and the cost estimate should be reduced accordingly.

Furthermore, the time estimate—1 hour per establishment—is grossly inflated. The regulatory change is really quite simple. Nothing in the duties test changes. The only thing an employer must learn is that the minimum salary for “white collar” exempt employees increases to $913 per week for regular employees and $134,004 for highly compensated employees. Employers may, if they seek to avail themselves of the commission/bonus provisions, spend additional time but it isn’t required of them to be compliant with the regulation. Being charitable, for the maximum of 3.9 million establishments potentially affected by the regulatory change in the salary threshold, the time necessary to become familiar with the rule is at most 15 minutes. That lowers the familiarization costs to $67 million in the first year.

2. Adjustment costs:

CBO assumes that employers will need to create new systems to manage the newly overtime eligible employees. The report specifically identifies timekeeping systems, changed working arrangements, and other management actions. CBO assumes it will take three hours per affected employee to institute these changes. The facts underlying these assumptions are never clearly stated. For instance, virtually every firm has an existing timekeeping system. Should the employer choose to convert a heretofore salaried exempt employee to nonexempt it should not incur any measurable cost in incorporating that employee into the system. Further, it assumes that current exempt employees are not keeping track of their time, which is not the case in many establishments.

Further, the regulation does not require that any employer change any employee from telecommuting to working in an office. These are voluntary actions taken by distrustful employers who don’t trust employees to accurately keep time. These actions should not be attributed to the regulatory change.

3. Management costs:

As with the other costs CBO estimates, the facts underlying its assumptions about management costs are never clearly stated. The costs involved in monitoring and managing work hours are not a consequence of the regulation but actions most employers routinely conduct for all their workers. To ascribe them to the regulatory change is to ascribe all routine workplace management to a simple increase in the salary threshold.

What the report mentions in passing but does not measure, which would result in potentially significant savings, is employers being freed from conducting duties tests for 12.5 million employees. An employer who cannot classify a worker paid less than the salary threshold as overtime exempt does not have to conduct periodic and often complex assessments of the duties these employees perform to determine if they continue to be exempt. It isn’t enough to make an initial determination of exempt status. The duties that employees perform must be examined periodically to determine if they are exempt, and new duties that may be assigned to exempt employees must be examined to determine whether the additional duties, along with the duties already assigned, are exempt. This is likely to result in savings that far exceed any real additional adjustment and management costs resulting from the salary increase. But these savings would be lost if the rule were repealed.