Topic: Regulatory Studies

Overtime Regulation Update

Following up a proposal announced last year, the Obama administration is set to raise the salary threshold at which employers must pay time-and-half for overtime hours (normally, those above 40 hours per week). Currently these rules apply to workers with annual salaries up to $23,660; the new rule raises this threshold to $47,476.  This will affect about 4.2 million workers, according to administration estimates.

What impact will this regulation have? 

In the short run, many employers will indeed pay higher total compensation to affected employees, given limited options for offsetting the mandated increase in wage costs. This is the outcome sought by regulation advocates.

In the medium term, however, employers will offset these costs by re-arranging work schedules so that fewer employees hit 40 hours, by laying off employees who work more than 40 hours, or by pushing such employees to work overtime hours off the books.

In the longer term, employers will reduce base-level wages so that, even with overtime, total compensation for employees working more than 40 hours is no different than before.  

Thus, expanded overtime will benefit some employees in the short term; cost others their jobs or lower their compensation in the medium term; and have no meaningful impact in the long term.

Is that good policy?

Insider Trading: The Unknowable Crime

Under our criminal justice system, ignorance of the law is no defense.  But what if the law is undefined?  Or what if it seems to change with every new case that’s brought?  What if unelected judges (with life tenure) started to invent crimes, piece by piece, case by case?  Holding people accountable for knowing the law is just only if the law is knowable, and only if those creating the law are accountable to the people. 

On Friday, Cato filed an amicus brief in Salman v. U.S. that is aimed at limiting the reach of just such an ill-defined, judicially created law. “Insider trading” is a crime that can put a person away for more than a decade, and yet this crime is judge-made and, as such, is ever-changing. Although individuals may know generally what is prohibited, the exact contours of the crime have remained shrouded, creating traps for the unwary.

The courts, in creating this crime, have relied on a section of the securities laws that prohibits the use of “any manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security. The courts’ rationale has been that by trading on information belonging to the company, and in violation of a position of trust, the trader has committed a fraud.  The law, however, does not mention “insiders” or “insider trading.”  And yet, in 2015 alone, the Securities and Exchange Commission (SEC) charged 87 individuals with insider trading violations.  

Broadly speaking, insider trading occurs when someone uses a position of trust to gain information about a company and later trades on that company, without permission, to receive a personal benefit.  But what constitutes a “benefit”?  The law doesn’t say.

Left to their own devices, the SEC has pushed the boundaries of what constitutes a “benefit,” making it more and more difficult for people to know when they are breaking the law.  In the case currently before the Court, Bassam Salman was charged with trading on information he received from his future brother-in-law, Mounir Kara, who had, in turn, received the information from his own brother, Maher.  The government has never alleged that Maher Kara received anything at all from either his brother or Salman in exchange for the information.  The government has instead claimed that the simple familial affection the men feel for each other is the “benefit.”  Salman’s trade was illegal because he happens to love the brothers-in-law who gave him the inside information.

Under this rationale, a person who trades on information received while making idle talk in a grocery line would be safe from prosecution while the same person trading on the same information heard at a family meal would be guilty of a felony.  Or maybe not.  After all, if we construe “benefit” this broadly, why not say that whiling away time chit-chatting in line is a “benefit”?    

No one should stumble blindly into a felony.  We hope the Court will take this opportunity to clarify the law and return it to its legislative foundation.  Anything else courts tyranny. 

A New Legal Blow Against Obamacare

The federal district court sitting in D.C. yesterday handed a victory to those who believe in following statutory text, potentially halting the payment of billions of dollars to insurers under the Affordable Care Act’s entitlement “cost-sharing” provisions.

Since January 14, 2014, the Treasury Department has been authorizing payments of reimbursements to insurers providing Obamacare coverage. The problem is that Congress never appropriated the funds for those expenditures, so the transfers constitute yet another executive overreach.

Article I of the Constitution provides quite clearly that “No Money shall be drawn from the Treasury but in Consequence of Appropriations made by Law.” The “power of the purse” resides in Congress, a principle that implements the overall constitutional structure of the separation of powers and that was noted as an important bulwark against tyranny by Alexander Hamilton in the Federalist 78.

It’s a basic rule that bears repeating: the executive branch cannot disburse funds that Congress has not appropriated.

Accordingly, in a win for constitutional governance, Judge Rosemary Collyer held in House of Representatives v. Burwell that the cost-sharing reimbursements authorized under the ACA’s section 1402 must be appropriated by Congress annually, and are not assumed to be appropriated.

Judge Collyer gave a biting review of the federal government’s argument in the case: “It is a most curious and convoluted argument whose mother was undoubtedly necessity.” The Department of Health and Human Services claimed that another part of the ACA that is a permanent appropriation—section 1401, which provides tax credits—also somehow included a permanent appropriation for Section 1402. Hearkening to the late Justice Scalia’s lyrical prose, Collyer explained that the government was trying to “squeeze the elephant of Section 1402 reimbursements into the mousehole of Section 1401(d)(1).”

Indeed, this ruling is a bit of a feather in Cato’s cap as well. The legal argument that prevailed here—that the section 1402 funds cannot be disbursed without congressional appropriation—first was discussed publicly at a 2014 Cato policy forum. The lawyer who came up with the idea, David Rivkin of BakerHostetler, refined it in conjunction with his colleague Andrew Grossman, also a Cato adjunct scholar who spoke at the forum. After BakerHostetler had to withdraw from the case due to a conflict, George Washington University law professor Jonathan Turley (who also spoke at the forum) took over the case.

Judge Collyer stayed her injunction against the Treasury Department pending appeal before the U.S. Court of Appeals for the D.C. Circuit. Regardless of how that court decides – as in King v. Burwell, even if there’s a favorable panel, President Obama has stacked the overall deck – the case is likely to end up before the Supreme Court. If Chief Justice Roberts sees this as a technical case (like Hobby Lobby or Zubik/Little Sisters) rather an existential one (like NFIB v. Sebelius or King), the challengers have a shot. But because Democrat-appointed justices simply will not interpret clear law in a way that hurts Obamacare, this case, like so much else, turns on the presidential election and the nominee who fills the current high-court-vacancy.

Whatever happens down that line, Judge Collyer’s succinct ruling makes a powerful statement in favor of constitutional separation of powers as a bulwark for liberty and the rule of law.

Update (June 2, 2016): It has come to my attention that this suit was conceived in a different manner than described above. As seen here, here, here, and here, it was Florida International University law professor Elizabeth Price Foley who conceived of the lawsuit and developed it with David Rivkin, both in terms of legal doctrine and amassing political support in the House. We’re proud to have Foley on the editorial board of the Cato Supreme Court Review.

Winners and Losers from the FDA’s Vaping and Cigar Crackdown

In the Food and Drug Administration’s crackdown on what is now a thriving market for vaping products (nicotine and flavorings delivered without tobacco through a vaporizing device), Trevor Burrus has identified one group that is likely to emerge as winners from the regulations, namely large tobacco companies, which have lost many smoking customers to the vaping market without being notably successful at playing in it themselves. Another set of winners? Governments whose treasuries are enriched by conventional cigarette sales. Under the 1998 tobacco settlement, which I and others at Cato have criticized at length, a large chunk of revenue from these conventional sales goes to state governments. But this revenue source has been eroded badly as smokers switch to vaping, a trend the new rules are well calculated to slow or reverse.

Who Benefits from Opportunities in the Online Platform Economy?

The rise of new business models in online platforms and the sharing economy have inevitably been met with calls for more regulations. In his most recent budget, President Obama proposed to expand funding for efforts to “crac[k] down on the illegal misclassification of some employees as independent contractors.” Policymakers at the state and local levels have also called for more stringent regulations on these new business models.

Over the weekend, voters in Austin failed to overturn the city council’s ordinance that would impose a series of new regulations on ride-hailing companies operating in the city, from requiring drivers to go through fingerprint-based background checks, to restrictions detailing where drivers can stop for drop-offs and pickups. In response, Uber and Lyft announced that they had suspended operations in the city. In light of this rush to regulate, it is important to consider the people who rely on the opportunities made available by the new online platform economy. People utilize these platforms in different ways. Some participants offset fluctuations in traditional income to maintain their standard of living, while others use the platforms to rent out assets to supplement earnings from their traditional jobs. People from every age cohort and across the income distribution earn money through these new business models. New regulations that obstruct the development of the online platform economy could harm the many different people who choose to utilize those opportunities.

In one report from the JPMorgan Chase Institute, the authors analyzed anonymized data from 260,000 customers with earnings from any of 30 established online platforms and found that a growing number of people are participating, but that their reliance on these platforms has not increased. In other words, more people are using these new models, but not as full-time jobs. Earnings represented 33 percent of monthly income in labor platforms, in which participants are connected directly to customers, like Uber or Lyft. In the capital platforms where participants rent or sell to customers, like Airbnb, earnings represented only 20 percent of monthly income. So in neither component are most participants relying on earnings from these platforms as the majority of their income, for most people these aren’t full-time jobs.

Federal Courts Shouldn’t Be Creating State Law

Should a federal court in Washington be guessing what common-law property rights a person has in New York, when there is a procedure in place that allows the federal court to ask the state’s highest court what the state law actually is? In Romanoff Equities v. United States, that’s exactly what the Court of Federal Claims (CFC, a special court that deals with monetary claims against the federal government) did, a “guess” that was subsequently affirmed on appeal.

The Romanoff family, as predecessors-in-title to a 1932 common-law right-of-way easement, had granted New York Central Railroad the right to “construct, operate and maintain” an elevated viaduct for the purpose of removing trains from pedestrian traffic in New York City. By the 1980s, however, the railroad no longer maintained the structure and, under the terms of the easement, the land and title were to revert to the Romanoff family. But the City of New York—wanting to convert the abandoned railroad viaduct into a recreational area (the High Line) that now includes taco trucks, salsa dancing, stargazing, retail shops, and other activities entirely unrelated to operating a railroad—asked the federal government to invoke the National Trails System Act and convert the easement into a public park.

The federal government granted the request, so the Romanoffs filed a lawsuit, arguing that converting the railroad right-of-way into a public park is a compensable taking under the Fifth Amendment. The Justice Department argued, and the CFC agreed, that the government’s conversion of the easement was not a taking because New York property law recognizes an “easement for anything” (!), allowing the City to use the property however it liked in perpetuity.

Why Big Tobacco Loves the New FDA E-Cig Regulations

Today the FDA issued new rules regarding the sale and production of e-cigarettes and e-cigarette “juice” (the nicotine solution that e-cigs vaporize). The regulations will severely hamper a thriving and highly competitive market, and “big tobacco” is jumping for joy.

It is often difficult to explain to non-free-market types how and why big business loves big government. The song is always the same: we need big government to stop and control big business. Today’s rule offers a great lesson in why that isn’t always the case.

Like most big companies, big tobacco is stuck in a rut–namely, traditional tobacco. When billions of dollars are invested in infrastructure to produce a single product, it is very difficult to shift that behemoth to a new line of production when the product becomes obsolete or unpopular. Thus, small businesses are often, if not usually, the first movers when it comes to innovation. Blockbuster Video, with a costly commitment to brick and mortar video stores, could hardly have been expected to change its entire business model to rental-by-mail or streaming. By the time the threat of  Netflix became existential, it was too late. Many times, when big businesses are in such a situation, one of their last ditch efforts will be to use government to prohibit or hamstring their competitors.

Big tobacco has had a similar problem for some time now. They’ve seen smoking rates fall precipitously, and all future projections show smoking rates continuing to fall. Imagine running a business where the demand to “grow, grow, grow” is belied by an inevitable and irresistible decline. So what do you do? Well, you try to expand into new products such as snus and e-cigarettes.

Yet big tobacco had the same problem that Blockbuster had with Netflix. They weren’t the first movers on e-cigarettes. As they continued to try to plow a field that had grown barren, small companies began to produce e-cigarettes, and people began to use them.

Full disclosure: I’m one of those e-cigarette smokers. What some have pejoratively called a “wild west” situation in desperate need of top-down regulation is actually a thriving market concerned with safety, innovation, and satisfying rapidly changing consumer preferences. There are sub-ohm vapes (huge clouds of smoke), vaporizers that look like lightsabers, vaporizers with variable voltages, and many others, not to mention the proliferation of juice flavors. My preferred vaporizer company, Halo Cigs, is constantly altering its products for better consumer satisfaction and safety.