Raise the Pay of Hard-Working Americans with an Update of the Overtime Rules

For decades, Americans’ wages have been stagnant—hardly growing at all, even as the economy becomes increasingly productive. Do you ever wonder why your paycheck is so thin? One reason might be that employers routinely ask workers to work long hours without extra compensation. President Obama has decided to fix this problem and will direct the U.S. Department of Labor to update its overtime regulations, which allow employers to deny overtime pay to millions of white collar workers who ought to receive it.

The salary threshold is supposed to be set at a level high enough to guarantee that regular employees can’t be misclassified by their employers as exempt executives, administrators or professionals, as a way to get around having to pay time-and-a-half for overtime work. Back in the days when the level was regularly adjusted, it was set at about $50,000-$60,000 a year in today’s dollars, which is reasonable and was high enough to protect most secretaries from being classified as exempt administrators, for example, and research assistants from being classified as exempt professionals. Today, the threshold is set at $455 a week, or $23,660 a year—$190 less than the poverty threshold for a family of four. Quite frankly, it’s a joke.

Because the salary threshold for exemption is so low, it has become common for restaurant and retail employees designated “assistant managers” to be paid a salary and denied any overtime pay, no matter how many hours they work in a week. This is especially problematic when—as is often the case—most of their work is non-managerial: they might spend most of their time waiting on customers, restocking product, or even cleaning floors. The current regulations allow employees to be classified as managers or administrators even if the vast majority of their work is routine or menial, as long as some part of it can be considered more important or supervisory work.

A young friend recently told me that his DC-area employer treats him as exempt, routinely expecting him to work 50 or more hours a week for no pay beyond his $35,000 a year salary. In the weeks he works 70 hours, his pay falls to less than $10 an hour. His community relations job is not obviously exempt from the overtime pay requirements: he doesn’t supervise anyone, it’s not a professional position that requires a special academic training, and he’s not an administrator. The same thing happens every day, all over the country in for-profit businesses that either don’t know the law or choose to ignore it, knowing that their employees don’t know the law or are too fearful to challenge them. But if the salary threshold for exemption were $1000 a week, instead of $455, my friend’s employer would have no argument about his right to be paid time and a half for his overtime. If that organization—or any business—couldn’t afford the extra pay, it would have to reduce employee hours to a more livable 40 per week, just as the law intends.

Thirty million salaried employees work in white collar positions that could be considered exempt from overtime pay under current rules. About 10 million would benefit from a rule that made clear that anyone earning less than $50,000 a year is not exempt from overtime pay and must be paid time-and-a-half for overtime work. For my young friend, ten hours of additional pay at 1.5 times his regular rate would mean an extra $250 a week, enough to pay off college loans or to save for the down payment on a house.

The president is directing Secretary of Labor Tom Perez to use his statutory power to protect workers from excessive and unpaid hours of work. He should propose a new rule that sets the salary threshold for exemption at $1000 a week. An updated rule can not only help employees who work hard get ahead; it can also provide a boost to the economy by putting money into the pockets of workers who are likely to spend it and encourage some employers to hire additional staff instead of working their employees excessively long hours.


  • TheBrett

    Great article. One of the most annoying things about having a low salary exemption is that it also tends to encourage the worst sorts of “measure employer productivity by hours worked” behavior by companies. You end up with the people who work 60-70 hours getting promotions, even if they’re not doing much more than people only scheduled to 40 hours would be doing.

    That’s not just in the US. The same thing happens in Japan and (I think) South Korea. Lots of workers on salary, with very long work-weeks well over 40 hours even if it’s not anymore productive.

  • http://www.economicsonlinetutor.com Jerry Wyant

    The last point in the post, “encourage some employers to hire additional staff instead of working their employees excessively long hours” perhaps would be a bigger boost to the economy than many people expect. This is a decrease in the opportunity cost of hiring more workers. If there is a disincentive to hire workers because you can give current workers a title and then get them to do the work for free, then eliminating this disincentive could create a lot of jobs. The money for the new workers would basically be paid out of the overtime of current workers, but under existing law they aren’t receiving it anyway. If employers are forced to pay overtime rates, many would likely choose to hire more workers instead. For employers, the new cost would actually create a situation in which overworked employees becomes a larger factor in decision-making. To the extent that the rule change creates jobs, it should also boost consumer demand. The income would go to people with even higher MPCs than overtime pay would.

    and
    encourage some employers to hire additional staff instead of working
    their employees excessively long hours. – See more at:
    http://www.epi.org/blog/raise-pay-hard-working-americans-update/#comments
    and
    encourage some employers to hire additional staff instead of working
    their employees excessively long hours. – See more at:
    http://www.epi.org/blog/raise-pay-hard-working-americans-update/#comments