Time and a half for overtime is one of the best-known and most important protections for workers in the United States. Yet many employers routinely undermine the protection by misclassifying workers as managers and thereby making them ineligible for overtime pay.
The extent to which employers game the overtime system was made starkly clear in January in a working paper published by the National Bureau of Economic Research. The title says it all: “Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments.” “Food cart manager,” “price scanning coordinator,” “carpet shampoo manager,” “lead shower door installer,” “grooming manager” and “director of first impressions” (for a front desk clerk) are some of the “fake-sounding” titles uncovered by the authors, Lauren Cohen of Harvard Business School and Umit Gurun and N. Bugra Ozel of the University of Texas at Dallas School of Management.
I talked to three people who want to make it harder for employers to misclassify workers: Nick Hanauer, a wealthy entrepreneur who founded Civic Ventures, a public policy incubator in Seattle; Heidi Shierholz, the president of the Economic Policy Institute, a think tank focused on low- and middle-income workers; and David Weil, who ran the wage and hour division of the Department of Labor during the Obama administration but was rejected by the Senate for the same job in the Biden administration.
I also interviewed skeptics of a stronger rule at the U.S. Chamber of Commerce and the International Franchise Association, whose franchisee members employ more than eight million people in the United States.
America’s overtime protection goes back to the New Deal, specifically the Fair Labor Standards Act of 1938. It says that if employers want certain people to work more than 40 hours a week, they must pay the employees at their regular hourly rate plus 50 percent — time and a half. It protects virtually all hourly workers as well as salaried workers below a certain pay threshold and even salaried workers who are above the pay threshold but are not in executive, administrative or professional jobs.
“When employers have to pay overtime, it actually means that they have skin in the game when they make decisions. When they say, ‘You have to work all weekend,’ it’s not totally free for them to do that. When it is totally costless to employers, workers’ lives end up not being taken into consideration,” Shierholz told me.
A lax overtime rule hurts good employers that treat their workers well, Shierholz said, since “employers who are willing to exploit their workers have a competitive advantage.”
All hourly workers are entitled to overtime, as are all salaried workers earning less than $35,568 a year. The problem comes above the salary threshold, where managers don’t get overtime. The new economic working paper found that listings for salaried positions with managerial titles are almost five times as common just above the salary threshold as just below it — which seems to be prima facie evidence that employers are gaming the system by handing out bogus titles.
The potential for abuse was obvious as long ago as 1940, when Col. Philip Fleming, then the administrator of the wage and hour division, wrote, “A title alone is of little or no assistance in determining the true importance of an employee to the employer. Titles can be had cheaply and are of no determinative value … it is not hard to call a janitor a ‘superintendent of maintenance’ if some result desirable to the employer will flow therefrom.”
Broadly speaking, there are two ways to combat this problem. One is to hire more inspectors to crack down on title inflation. Weil told me that in 1939, the wage and hour division had 131 investigators who were responsible for 29,442 establishments. By 2021, it had 800 investigators who were responsible for 11 million establishments. So the workload for each inspector is 61 times as high now as in the Depression. What’s more, he wrote in an email, “the workplace is a far more complicated and varied place now than in 1939, when the employment relationship was far more straightforward.”
Another way to combat underpayment of overtime is to tweak the rule to rely more heavily on a person’s pay and less heavily on the person’s purported duties as a way to judge whether the person deserves overtime. A higher pay threshold would protect more workers automatically, regardless of what employers claim about their duties. In reality, the opposite has happened. The share of workers protected by the pay standard has fallen. As the chart below shows, it was 63 percent in 1975 and had fallen to 10 percent by last year.
If the duties standard is so subject to trickery, you might think the government should abandon it and rely solely on the more easily measurable pay standard. Hanauer, the head of Civic Ventures, who has been working overtime on the overtime issue since 2014, told me he thought everyone earning under $90,000 annually should be guaranteed overtime pay. That would restore the protection to the high-water mark of 1975, in terms of the percentage of full-time salaried workers covered.
“We used to live in a world where we respected people’s time,” Hanauer said. “People are working harder than ever and falling further behind because there aren’t these basic protections we used to have. Everything heals when people get paid fairly.”
But guaranteeing overtime to everyone earning under $90,000 a year probably would not pass muster with the courts. In November 2016 a federal judge in Texas issued a nationwide injunction against an overtime rule promulgated by the Obama administration. The next year the judge said the rule violated the intent of the 1938 act by setting the salary threshold so high that the duties standard became irrelevant. (The threshold was to to be set at $47,476 a year and then rise in sync with average wages. If the rule hadn’t been struck down, the salary threshold would be at $58,500 this year, Shierholz calculates.)Shierholz, who was the Labor Department’s chief economist at the time, disagreed with the judge’s interpretation, but there wasn’t time for an appeal before Donald Trump took office the following January.
All eyes are on the Biden administration, which announced last month that it was aiming to put out an overtime rule for comment in May. That would give it one year to collect comments, respond to them and issue a final rule by about May 2024. Any later than that and the rule would fall within the period in which the next Congress would be able to kill it under the Congressional Review Act.
Marc Freedman, vice president of employment policy at the U.S. Chamber of Commerce, told me he doesn’t see why a new rule is needed now, considering that the current rule is pretty new (the Trump administration revised it in 2019 in response to the Texas judge’s ruling) and that the U.S. economy is strong, so workers are being well paid. Freedman said employers worry that stepped-up inspection would be unfair to them: “There is a tendency among some of those folks to assume employers are mistreating their employees.” And he said the fact that a smaller percentage of workers are guaranteed overtime by the salary standard (as shown in the chart above) isn’t relevant, since what should count is workers’ duties, not their pay. Freedman said his members also oppose adding an automatic escalator clause to the rule.
“Many employees really don’t want to be reclassified” and lose their managerial status, Freedman said. “They see it as a professional credential. It gives them a feeling of status.”
Mike Layman, the senior vice president of the International Franchise Association, told me, “The biggest problem facing small business right now is a shortage of qualified workers. Four out of five franchiser systems are not growing as they’d like because their franchisees can’t find enough workers. Adding a layer of regulatory restrictions to how small business can recruit and retain employees that they’re working desperately to find already doesn’t seem to fit the times.”
Seems to me that proponents of stronger overtime protection have the better of the argument. It will be interesting to see how strong the Biden administration’s proposed rule will be. Biden prides himself on being a pro-labor president, and this is a key issue for the labor movement, so the Labor Department’s rule might be pretty tough. Weil said the delay in putting it out is probably to tighten it up against the inevitable lawsuits by business. “This is going to be the ‘go big or go home’ approach,” Freedman predicted. Going big might be exactly the right move.
Elsewhere: Greek and Italian Household Debt
People tend to think of Greece and Italy as highly indebted nations, and that’s true when it comes to their governments. Greece’s public debt was 194 percent of gross domestic product in last year’s third quarter, and Italy’s was 147 percent of G.D.P., according to data from the Organization for Economic Cooperation and Development. But Greece and Italy are well below average in private-sector debt as a share of G.D.P., as this chart shows.
The light debt burden in the household and business sectors of Greece and Italy has helped them withstand increases in interest rates by the European Central Bank, George Saravelos, the head of foreign-exchange research at Deutsche Bank, wrote in a client note Monday. “Over in wintry Stockholm, house prices are nearly down 20 percent from peak, G.D.P. is contracting, and Swedish consumers are not very happy,” he wrote. “Over in summery Athens, house prices are up 40 percent since Covid, business sentiment is rebounding, and local investor sentiment bullish.”
Quote of the Day
“Money … is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy.”
— David Hume, “Essays: Moral and Political” (1741)
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