The Administration’s New Overtime Proposal: Some Background on a Great Idea

March 12th, 2014 at 5:51 pm

You will not be surprised by my assertion that presidents do not always mean what they say, or at least they often lack follow-through.  Well, when he said he’d do what he could to help working people get a better shot at seeing more of the economy’s growth in their paychecks, with or without Congressional support, President Obama appears to have meant it.

His administration just announced their intention to change a rule governing eligibility for overtime pay.  For a number of reasons I’ll get to in a moment, a significant number of workers—in the millions—should be eligible for time-and-a-half when they work more than 40 hours in a week, but they’re not.

Why not?  If you’re an hourly paid worker, you’re automatically eligible for OT pay, but it’s a bit more complicated if you’re paid a salary.  First, there’s a weekly-pay threshold below which you must get OT.  Otherwise, unscrupulous employers could arbitrarily change an hourly worker to a salaried one, even if they earn very little, and avoid OT.  That threshold was last increased a decade ago, and stands at $455 (it is not adjusted for inflation).

Second, there’s a test of whether what you do at work involves supervising others.  If so, and if your salary is above the threshold, you’re typically ineligible for OT.  But things have devolved in unfortunate and unfair ways: at this point, if your employer classifies a tiny proportion of what you do as supervisory, you can be exempted from OT.

The administration aims to fix these problems and the beauty is they can do so through rule changes which do not involve Congress.  Following a comment period where stakeholders can weigh in with the Labor Department, the administration can raise the salary threshold below which you must get OT; they can also change the rules such that you have to be bona fide supervisor—i.e., spend the majority of your time at work actually supervising or doing similarly executive-type tasks—to be exempted from OT coverage.

Simply adjusting the 2004 threshold for inflation would take it up to around $550; Ross Eisenbrey, with whom I’ve worked on this issue, and I point out that in today’s dollars, the 1975 threshold would be about $970, and our work provides a number of what we view as compelling rationales in support of the higher number.  For example, when the 1975 threshold was about 1.6 times the median wage; updating that ratio using today’s median wage results in a threshold of around $1,050, above our recommended $970.

Ross and I also note, in favor of a $970 threshold (and it should of course be indexed for inflation):

  • BLS publishes data (most recently from 2010) of supervisory workers—and thus presumably exempt from OT pay—by occupation and median weekly earnings (U.S. BLS National Compensation Survey).  For management occupations, the BLS breaks out four levels of supervisory responsibilities, and the median weekly earnings range from $1,520 to $3,995.  By this metric, our threshold is well below a level associated with supervisory, and presumably exempt, duties.
  • Looking at the full list of median earnings for supervisory jobs in management, only “team leaders” who were preschool education administrators, food service managers, property managers, and lodging managers earned below our threshold.  Many of these are precisely the type of workers we’d want the rule change to cover.

The employers’ lobby—whose agenda increasingly diverges from that of employers’ themselves—will certainly complain loudly over the proposed change, but I’d stress that much of what we’re talking about here is simply an inflation adjustment to an eroded threshold—and thus an eroded labor standard.

I’d also note that one of the motivations of the OT rule in the first place (it was part of the 1938 Fair Labor Standards Act) was to incentivize increased job creation for employers who want to avoid paying someone overtime.  An employer who doesn’t want to pay OT to a newly-covered worker can always hire someone else at the straight-time wage, which happens to scratch another labor market itch we have right now (and the newly-covered worker is no worse off).

So I applaud the administration for doing what it can in the face of stifling politics to improve and uphold labor standards, and for introducing a bold measure with the potential to help a lot of working people get the overtime pay they deserve.

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11 comments in reply to "The Administration’s New Overtime Proposal: Some Background on a Great Idea"

  1. Larry Signor says:

    I wonder who is pushing this agenda in the White House? Kudos to them.

  2. urban legend says:

    And do it with minimum required time! It’s one thing to say we’re going to do it (once we’ve jumped through all the hoops expected whether legally mandated or not!) in the hopes of looking good, another to actually follow through. One way to impose self-discipline for the follow through would be a dedicated and prominent link on updating progress on the rule, including steps that still are outstanding.

  3. save_the_rustbelt says:

    So what will happen? (I’ve been teaching compliance to companies for 30+ years.)

    Employers will update policies and procedures, tighten discipline (discipline of employees is required by wage-and-hour laws) and will have to put many people back on the time clock, strictly enforcing punch-in, punch-out rules, strict timing for breaks and meals, etc.

    In many companies if a salaried worker takes a couple of hours off to see the dentist or take a child to the doctor there was no docking of pay, once they qualify for overtime that will end.

    So, many salaried employees who have been treated like managers (grown ups) will again be treated under strict compliance rules.

    Gee Jared, this whole business-as-evil-overseer stereotype belies the fact that not all businesses are huge corporations with giant cash stockpiles. For many the recession never really ended.

    • doverby says:

      Even if companies did exactly what you say they will do, the pros more than outway the cons. Is it really that big of a deal if you have to clock in and clock out? I’ve been both an hourly worker and a salaried worker. I do get a bit more freedom as a salaried worker (taking longer lunches if I have errands to run, leaving early to pick someone up from the airport, etc.). But I still end up working more than 40 hours per week on average. I’m just an anecdote, but a study done by the U.S. Bureau of Labor Statistics found that the average salaried worker works 45 hours a week. You make some decent points, but I fail to understand exactly why it’s such a bad thing in the grand scheme of things.

      • save_the_rustbelt says:

        In the current economic environment employers will adopt the following:

        You employee, have the same amount of work, but no overtime unless you have prior approval which ain’t gonna happen. So, get it done in 40 hours.

    • smith says:

      This is unfortunately true, that newly classified hourly employees can lose freedom granted to salaried employees and be treated like children. Putting people back on hourly pay can have huge downsides. As someone who has advocated a change in the rules covering work hours, specifically the exempt status given salaried workers, I think this is an important unaddressed issue (at least by me, Dean Baker, Krugman, and others who have pointed out Europeans work less).
      Isn’t it possible for workers to be fairly compensated for working overtime without making them punch a clock? How did they know the same salaried employees were putting in their hours? Part of the problem revolves around the issue of how much overtime hours are actually recorded by an employee, and the potential for abuse. Motivational factors favoring more productive work (quicker completion time) can be changed. This should be studied, and adjustments made, whether legally, regulatory, or culturally. However, there still is a huge problem with all workers, not just low wage workers, being exploited and made to work overtime without compensation. And this is only a second cousin to a goal of reducing work hours to at most 35 hours/week.

      For background information, missing are the very significant changes that Bush administration made to regulations about who is covered. I would like to know which ones Obama is going to address, or whether the feeling is the wage adjustment will kind of subsume other contemplated changes. An important point, covered by the discussion of inflation adjusted dollar figures, is that this is merely RESTORING a previous working feature of our labor market.

      Also, someone should think about why tech workers have a special level. Even if it is set high at $50,000, (only the median) how much does that hurt the economy and inequality by keeping an important middle class or upper middle high skills class wage suppressed? What’s the reason tech job wages rose only 1/3 percent per year?

      • smith says:

        I hadn’t seen or read today’s New York Times editorial on the subject before writing the above reply. They provide more background and a reason for emphasizing the automatic non-exempt status based on income. Raising the income limit is easy to justify because it’s just adjusting previous levels for inflation, and simpler, and needn’t involve a long period of analysis and delay in implementation. The Times also worries there is not enough time in his current term for Obama to implement comprehensive change. How did Bush push his changes before the end of his first term? Just smarter I guess.
        Where is the push for rolling back hours to 35/week going to come from? It must be phased in, one must advocate forcefully for years to change the culture, there is a tipping point. When an influential percentage of business offers 35 hours, they lobby for a law mandating this for everyone in order to level the playing field. The same process occurs with environmental standards and labor safeguards, especially worker safety.

  4. Sharen Stoner says:

    Beware unintended consequences. Marginal employees (seniors?) will be released because they take 9 hours to do 8 hours of work; timeclocks for everyone; no written overtime or you are released; no voluntary additional hours at straight time. Bye-bye. I run a small business and I can’t afford to pay overtime pay all the time. I pay my employees time and a half if wages are under $16 an hour; but over that, with supervisory and/or a separate professional license, I pay straight wages for any overtime. I have a person who is buying a house and wants to work 10-15 hours extra a week. It is voluntary and we have the work. If this administrative order goes through, that will be disallowed. I will not hire another person (who knows if the work will dry up in the coming recession) and probably will just spread the work around. In the real world, this is a bad idea.

  5. Flex says:

    Having been an exempt, salaried, employee (automotive engineer without any supervisory responsibility) for 20 years, and still have been forced to complete a time-card the entire time, I think this is a great idea. Time cards are already used for salaried employees in most of the larger corporations I’m aware of as a tool to track work done for different cost centers. I.e., the time I spend working on one project is charged to that project through the time-card system.

    However, compliance is going to be an issue.

    At the corporation where I work, the mid-level managers will not approve time-cards with more than 40 hours on them for exempt employees, even if they are not paying OT. I’m not entirely certain why, but I think it’s largely due to the perception that if a group is working a lot of OT, it suggests that their management is poor.

    Further, in order to reduce overhead charges in a group, no groups that I’m aware of accurately reports the time spent on internal work. If two technicians spend 4 hours refurbishing an amplifier, that time is charged to a single project not as overhead. Higher level managers judge how competent a mid-level manager is by how they meet their budget, so pushing expenses onto another manager’s budget is a traditional means of making your own budget look better. (How petty is this? Last year I was told to not order AA batteries for our group, but to take them from a supply cabinet maintained by another group.)

    Frankly, I feel OT should be reported properly because it can be used to justify hiring additional employees when necessary to do the work. Further, since our upper management can only judge the amount of work we do by the time-cards we fill out every week, our upper management is getting incorrect information about the state of the company.

    But because managers approve time-cards, and can even make changes to them, there is a real risk that the proposed new rules will not make any difference. (I can already hear the rebuttal, “By the IS records, you have spent 2 hours this week reading Jared Bernstein’s OTE blog, so we are not going approve any of the 16 hours OT you claimed.”)

    I suspect that at least part of the efficiency gains reported in the past twenty years is related to undocumented overtime.

    • Jared Bernstein says:

      Thanks much for sharing this, Flex. There’s a real deficit of info on how these rules play out in the real world but much of what I’ve learned sounds like this and raising the salary threshold–with proper enforcement!–is a straightforward way to help.

      I’d encourage others to tell us their experiences with OT and other labor standards, and how they’re enforced or ignored in the workplace.

      Finally, if I were the boss, I’d give a fat raise to anyone caught reading OTE!

  6. James Vaughn says:

    As a small business owner, a CPA, we have a seasonal need for overtime. I know other businesses who push overtime when the need arises. I am not going to hire another employee, who, when I let go after the busy season can collect unemployment for an almost permanent time. I prefer to build the amount I pay to my professionals into their salary and they understand the requirement up front. I do not think that additional employees will be hired by those employers who have a short term need for extra hours. I could certainly change people to hourly and do the overtime bit, but my hourly wage with then be calculated so that I come out basically the same. I bet most small businesses will do the same. Small business has been hit very hard with regulations, limits on tax deductions and now a potential overtime issue. We will survive, but this government has not handed much to small business.