How Can Obama Fix Overtime Pay?

Originally published in The JHU Politik on April 13th, 2014.

The Obama administration recently announced plans to revise overtime pay regulations under the Fair Labor Standards Act (FLSA). Under the law, employees who work more than 40 hours per week are entitled to time-and-a-half in overtime pay, but many categories of employees—notably “executive” and “administrative”—are exempt under FLSA. Unfortunately, within the last decade many employers have found ways to misclassify their workers as executives, managers and administrators in order to avoid paying them overtime. Now the Department of Labor wants to update the regulations by both tightening the duties that employees would have to perform in order to be recognized as managers and by raising the minimum salary threshold above $455 per week.

The Obama administration isn’t the first to amend the 1938 regulations. Back in 2004, Bush administration officials raised the minimum weekly salary threshold from $250 to $455 (or yearly salaries of slightly under $24,000 per year). They also relaxed the description of duties, effectively weakening the exemption standards for managers. This meant that fewer workers were now entitled to overtime pay than before. (Some economists argued that this regulation effectively barred more than six million workers from receiving overtime.)

At an International Association of Fire Fighters legislative conference in March, U.S. Labor Secretary Tom Perez said in a speech, “As a result of a loophole that was written into the regulation in 2004 by the Bush administration, quite literally somebody can work 1 percent of their time on management issues, 99 percent stacking the shelves and doing other work that has nothing to do with management, and you’re considered a manager, and you are no longer entitled to overtime.”

The original law purports to prevent employers from misclassifying their workers as managers. Indeed, regulation 29 CFR 541.2 states, “A job title alone is insufficient to establish the exempt status of an employee. The exempt or nonexempt status of any particular employee must be determined on the basis of whether the employee’s salary and duties meet the requirements of the regulations.”

However, there remain enough ambiguities that employers have found ways to still misclassify their workers and avoid paying overtime. Notably, one regulation codified in 2004 states that the law will henceforth recognize employers working “concurrent duties” of “exempt and non-exempt work” on a “case-by-case basis”—meaning that one could still be considered a manager or executive even if they are not doing managerial or executive work.

The White House is also talking about raising the minimum salary threshold. According to Betsey Stevenson, a member of the White House Council of Economic Advisers, there are 3.1 million people who would have been automatically covered by overtime provisions had the threshold kept up with inflation. 

Since 2004, the Consumer Price Index has increased by about 23.3%. So had the minimum salary threshold kept up with inflation, it would now be around $560 per week. All things considered, that’s still pretty low. The Washington Post reported that officials are considering raising the threshold to somewhere between $550 and $970 a week, or $28,600 and $50,440 a year.

The key point to understand is that just doing one of these measures is not enough to eliminate the perverse incentives in FLSA. Raising the salary threshold without tightening the duties test to be considered a manager might raise the salary of some workers but it would still allow employers to misclassify their employees as managers, and thereby skirt overtime pay.

There are also macroeconomic arguments for fixing the regulation. “By discouraging the use of overtime, we will be encouraging companies to hire more workers. This is simple logic,” wrote co-director of the Center for Economic and Policy Research, Dean Baker in an email. “If a company needs extra labor, but now has to pay a premium for working people overtime, it is more likely to fill this demand by hiring new workers. This is what we want.”

While the process of revising FLSA could extend until 2015, the administration’s initiative is good news. If the Department of Labor does this revision right, then employers will have to either pay more workers overtime, or hire additional employees. Both are desirable outcomes.