Clause 61: The Pushback Blog

Because ideas have consequences

Overtime Sudden Death

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This spring, while you weren’t looking, President Obama ordered the Department of Labor to revise the regulations governing overtime pay. Specifically, for an employee to be exempt from requirements to be paid overtime (often called an exempt employee), three tests are applied:

  1. Salary basis test: The employee must be paid a predetermined and fixed salary that cannot be reduced due to variations in the quality or quantity of work the employee performs. Hourly employees and workers being paid piece rates cannot be exempt.
  2. Salary level test: The employee must be paid at least a minimum amount specified by regulation. As of this writing, that amount is $23,660/year, last revised in 2004.
  3. Duties test: The employee must have duties that are primarily executive, administrative or professional.

The centerpiece of the change was a revision of the salary level test, bringing the threshold salary up to $47,446/year. These rules were to take effect on 1 Dec 2016.

I don’t have a problem with labor law in general or with revision of the salary level test in particular. I invite those readers who disagree to read a special section of this post I have included at the end to discuss the history of labor law.

It would have been better to have a multi-year incremental ramp. Businesspeople can handle predictable change much better than sudden change.

However, there was a significant process problem. Obama clearly believed that he could not obtain the consent of Congress. Being of superior intellect and wrapped in righteousness, Obama went ahead and issued a Presidential Memorandum — basically an executive order — directing the Department of Labor to go forward with the changes.

Obama may well have been right in his supposition. It’s irrelevant, because Congress is the entity empowered by the Constitution to make law. Consider, by way of analogy, if I were to say, “I would have asked you for money to feed the homeless children, but I knew you would never agree. So I took one of your checks and forged your signature.” Whatever my supposedly higher purpose would have been, my action would still not be acceptable.

Since those opposing the changes did not get the opportunity to have their views represented in Congress, they went to court. This week, a federal judge in Texas issued a nationwide injunction blocking implementation of the new rules. In his ruling, the judge found that the Department of Labor exceeded its authority under existing law and ignored the intent of Congress.

I find it particularly noteworthy that the primary plaintiff in the case is the State of Nevada, itself a government entity. The case raises challenges to the ability of the federal government to restrict the employment practices of state governments on Tenth Amendment grounds, although the judge did not accept this reasoning.

The proposed changes also include a mechanism to automatically update the salary level threshold every three years based on statistical data. The court found that there was no provision in existing law to implement this. Therefore, absent the expression of the will of Congress, the Executive exceeded its authority.

This decision is only a stay; the final fate of the change in law remains to be decided. However, one of the tests that the court applied was: Does the plaintiffs case have substantial likelihood of success on its merits? The court found that it did.

Special Bonus Media Question

This issue first arose in May 2016, when Obama issued his Presidential Memorandum. How much have you heard about this, before or after the court decision of this week, from the media outlets you frequent?

The Origins of Labor Law

One hundred years ago, there were few labor laws. Employers enjoyed concentrated negotiating power and could dictate almost any terms. There were widespread abuses, including:

  • Failure to pay employees on time;
  • Payment of wages in company scrip, which could either be redeemed at the company store for goods at arbitrary prices or exchanged at a discount for currency;
  • Implementation of arbitrary deductions from pay;
  • Failure to disclose deductions from pay.

“Well, if you don’t like it, don’t work for that employer.” This is a shallow and cavalier brush-off that ignores the disparity in bargaining power.

The Anglo-American legal tradition has not accepted such a principle. Here is an illustrative case in black-letter law. A railroad required its employees to sign contracts relieving the railroad of responsibility for the negligence of other employees (as the organization itself acts through the agency of employees, including managers and executives). The state supreme court rejected the notion that the employer could escape from responsibility in this manner:

And it may be questionable whether it is in their power to denude themselves of such responsibility by a stipulation in advance. But we prefer to rest our decision upon the broader ground .of considerations of public policy. The law requires the master to furnish his servant with a reasonably safe place to work in, and with sound and suitable tools and appliances to do his work. If he can supply an unsafe machine, or defective instruments, and then excuse himself against the consequences of his own negligence by the terms of his contract with his servant, he is enabled to evade a most salutary rule.

In the English case above cited it is said this is not against public policy, because it does not affect all society, but only the interest of the employed. But surely the state has an interest in the lives and limbs of all its citizens. Laborers for hire constitute a numerous and meritorious class in every community. And it is for the welfare of society that their employers shall not be permitted, under the guise of enforcing contract rights, to abdicate their duties to them. The consequence would be that every railroad company and every owner of a factory, mill or mine, would make it a condition, precedent to the employment of labor, that the laborer should release all right of action for injuries sustained in the course of the service, whether by the employer’s negligence or otherwise. The natural tendency of this would be to relax the employer’s carefulness in those matters of which he has the ordering and control, such as the supplying of machinery and materials, and thus increase the perils of occupations which are hazardous, even when well managed. And the final outcome would be to fill the country with disabled men and paupers, whose support would become a charge upon the counties or upon public charity.
— Little Rock & Fort Smith Ry. Co. v. Eubanks, 3 S.W. 808 (1886).

The spirit of this ruling cannot be ascribed to progressivism, as it predates progressivism. It was written in a time when judges were unwilling to rewrite the law. It stands as a historical marker, attesting that our legal tradition has never accepted an interpretation of laissez-faire that grants market participants with concentrated negotiating power free rein to impose whatever terms they choose on market participants with diffuse negotiating power.

Labor law originated in response to real abuses in the employment market. Abuses still occur, even with the laws in place. For example, I recall a software company in the nineties that would put salaried employees on a 36-hour week every time the owner got in a cash flow bind. That is not how being salaried is supposed to work. The employees may have made a calculated decision that enduring this was better than being laid off, but it is not OK. Tolerating this puts the competitor, who may also be in a cash flow bind, under unwarranted pressure to do likewise.

It is obvious to anyone giving this a moment’s though that employers can and do classify employees as salaried in the expectation that they will be working at least forty hours a week and that the employers wish to avoid paying overtime to these employees by making this classification. It is reasonable for the law to implement defenses to such reclassification practices, which are simply to evade compliance.

 

 

 

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Written by srojak

November 25, 2016 at 11:06 am

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