Elections, especially Presidential elections, have consequences. Few need reminding of this truism after 2016. But the distributional consequences of American Presidential elections have long antedated the emergence of Trumpism in the Republican Party. On no issue is this clearer than those involving the regulation and protection of benefits for American employees. This is illustrated by the rule proposed on March 22 by the Department of Labor, 84 Fed. Reg. 10900, to set a new minimum salary threshold for workers whom employers can classify as executive, administrative, or professional employees exempted from an entitlement to time and a half overtime pay pursuant to the Fair Labor Standards Act (FLSA). 29 U.S.C. § 213(a)(1). The Trump Administration’s response to the Obama Administration’s aborted attempts to expand the number of American workers protected by the FLSA probably would have been the same in a Rubio or Bush administration. And the general consequences of this response for the proportionate returns to labor and capital seem clear.
The FLSA requires employers to pay each of their employees for any hours worked in excess of forty in any week “at a rate not less than one and one-half times the regular rate at which [the employee] is employed.” 29 U.S.C. § 207(a)(1). The FLSA, however, exempts numerous classes of employees from the coverage of this requirement. The most important of these exemptions, included in the Act since its passage in 1938, excludes those employed in a “bona fide executive, administrative, or professional capacity.” The Act expressly states that these terms are to be “defined and delimited from time to time by regulations” of the Secretary of Labor. 29 U.S.C. § 213(a)(1).The Secretary, from regulations promulgated in 1940, has defined the executive, administrative, and professional exemptions, often described as the EAP or white collar exemptions, by requiring satisfaction of three tests: employment duties matching one of the categories, being paid through a salary rather than an hourly wage, and having that salary be above a minimum level. The regulations have required a minimum salary to ensure that an employer’s classification of an employee as EAP is “bona fide.” The white collar exemptions are based on an assumption that EAP workers differ from production workers in part by having to exercise independent judgment and discretion. Employers thus are not likely to view those hired to fill bona fide EAP positions as fungible with other workers. The employers are likely to pay these workers at a relatively high salary level, not through an hourly wage, and also to expect them to work longer hours rather than spread their work to others.
In May, 2016, the Obama Department of Labor finalized a new regulation that raised the minimum full year salary threshold for the EAP exemptions from $23,660 to $47,476. 81 Fed. Reg. 32391 (May 23, 2016). The Obama Administration rule set this salary level at the 40th percentile of earnings of full-time salaried employees in the lowest wage census region, the South, and it included a provision that automatically updated the level every three years, based on this percentile. This significant revision of the salary threshold was the first since 1975. In 1975, more than 60% of full-time salaried workers earned below the threshold. In 2016, less than 7% of such workers earned below the threshold, making it almost a meaningless test of whether an employer’s classification is bona fide. The Obama Administration rule would have raised the percentage of salaried workers who could not be excluded because of the salary threshold to about 33%.
Before the Obama rule could go into effect, however, in November, 2016, Amos Mazzant, a District Judge in the Eastern District of Texas, issued a nationwide preliminary injunction against the rule, seemingly holding that by requiring a minimum salary as a condition of EAP status, the Department of Labor had been exceeding its rulemaking authority under the FLSA for seventy-six years. The Obama Department of Labor of course appealed this astonishing opinion, which misinterpreted legislative history and applied a distorted version of Chevron review. But in June, 2017, the Trump Administration advised the Fifth Circuit Court of Appeals that though it did not accept the District Court’s rejection of any salary basis test, it would not defend the Obama rule. In August, 2017, Judge Mazzant granted summary judgment to the states and business organizations that had challenged the Obama rule.
The Department of Labor’s new proposal falls well short of the Obama rule. It would set the full-year salary threshold at an unindexed 20th rather than an indexed 40th percentile of earnings of full-time salaried employees in the lowest wage census region. This would result in a $35,308 threshold for 2020, compared to the roughly $51,000 salary that the indexed Obama rule would have reached by 2020, and the $58,000 the 1975 level would have reached if indexed for inflation. The proposed $35,308 full-year salary threshold, like the current $23,660 threshold, is a porous screen against an employer’s misclassification of workers who do not exercise the kind of independent judgment or discretion that would enable them to claim in any negotiations that their hours of work could not be easily replaced by the hours of supplementary fungible workers. It seems reasonable to assume that workers who can claim such status will be paid a salary exceeding $50,000.
Regardless of whether the Obama Administration’s indexed 40th percentile or the Trump Administration’s unindexed 20th percentile standard better serves the FLSA’s categorization of EAP workers exempted from the overtime wage requirement, however, there can be no doubt that the two standards have vastly different distributional consequences. A report by the Economic Policy Institute (EPI) concludes that the Trump Administration proposal, compared to the aborted Obama rule, will result in between 1.2 billion and 1.6 billion dollars of lower annual wage gains for workers who are currently classified as exempt EAP employees.This analysis apparently assumes that employers will increase the salaries of bona fide EAP employees to satisfy a new salary threshold rather than instead treat some of these employees as fungible wage earners. This may not be true for every currently EAP-exempted employee, but treating formerly exempt employees as wage earners would demonstrate prior misclassification and itself increase the labor share of returns through overtime wages. Moreover, as the EPI report stresses, a complete analysis of the differing effects of the Trump Administration proposal and the Obama rule must also account for the effects on employees who are currently not classified as exempt but who are given strengthened protection against misclassification by a higher salary threshold. The EPI report estimates that while the Obama rule would have given 3.1 million more workers directly increased wages in 2020 than would the Trump Administration proposal, the Obama rule also would have provided another 5.1 million more workers who are not bona fide EAP employees the salary threshold’s stronger protection against misclassification in the future. The EPI report estimates that the number of workers “left behind” by the Trump Administration proposal would grow to 11.5 million over a decade of implementation.
The exact aggregate economic consequences of the replacement of the Obama rule by the Trump Administration proposal may be difficult to predict, but the vector of the replacement for the division of economic returns between capital and labor is not. And whatever the aggregate impact, the effects of the replacement will be felt by many individual lower wage “white collar” workers, workers whose economic position is no less marginal than those production employees who were the original intended beneficiaries of the FLSA.