Here’s how the new overtime regulations could harm Silicon Valley
This year, the Department of Labor proposed a new regulation that will bump the threshold for the minimum income that qualifies for mandatory overtime pay. The new rules will more rigidly define compensation structures for millions of employees throughout the economy.
This could be really bad news for Silicon Valley.
The tech industry does not pay employees like factories do. Early stage startups face a unique challenge: building a great team with minimal expenses. New ventures without deep pockets can try to overcome this disadvantage by offering equity instead of only cash.
Overtime rules have not been a menace to startups so far because the minimum income threshold tended to be well below starting salaries. Previously, individuals making under $23,660 a year qualified for overtime pay, which works out to one and one-half times the hourly wage for each hour worked after 40 hours a week. These employees typically have to “punch a time clock” when they enter and exit the workplace.
If the DOL’s new proposal is passed, an estimated five million salaried workers throughout the economy will be joining the time clock stamp camp. The regulation seeks to increase the $23,660 threshold to $50,440. Employers would now have to track the hours of all workers earning up to $50,440. Others have discussed the consequences for higher education, retail, and non-profits.
But this regulation will be significant for tech startups as well. Putting aside those expensive software engineers, startups have many roles in marketing, operations, finance, and customer service that would fall in this salary range. And because employees in startups are paid partly in equity, some base salaries would fall in the range of the proposed overtime pay rule.
Many early startups pay in equity because they do not have enough funds to pay employees the cash salaries they might receive elsewhere. Paying in equity also ties the employee’s efforts to the success of the company and encourages greater productivity — a structure key to the growth of a startup.
Compliance will come at a high price. Most small startups do not have in-house counsel. The lawyers who work with startups typically charge between $350 and $800 per hour, and legal costs for non-complex matters, such as payroll and worker classification, are about $5,000 a year. For a company that is trying to get off the ground and battling the hurdles of fundraising, this is a real dent in the wallet.
Then there’s the question of how startups should measure “working.” Jobs in startups are almost always the opposite of the standard, hourly paid, nine-to-five job.
Employees of startups are known to work unusual or late hours, often from home. They may choose to do so because their efforts are tied to the company’s success. And unlike an assembly line job, there are complexities surrounding what it means to be “working” at a startup. Does checking your work email on the weekend count as work? Should employees clock their hours if they are researching marketing strategies one evening? Do lunch meetings count? These questions and many more remain.
Many aspects of this overtime regulation are premised on a traditional view of what it means to work and on a traditional view of a compensation structure. But these factors aren’t easily applicable to the 21st century, and in particular, to tech startups.
We should question whether the Department of Labor should be in the business of creating more and more complex codes detailing exactly what it means to work in the 21st century. At the very least, labor regulations tailored for the industrial age should not inhibit the growth of our most dynamic sector.
Liya Palagashvili is an assistant professor of economics at SUNY-Purchase, an affiliated scholar with the Mercatus Center at George Mason University, and one of Forbes’ “30 Under 30” in Law & Policy for 2016.
