Commentary | Unions and Labor Standards

It’s Time to Update Overtime

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This article first appeared in The New York Times.

WASHINGTON — PRESIDENT OBAMA has assured American workers that he won’t let Congress keep him from lending a hand during these tough economic times. “I will not allow gridlock, inaction or willful indifference to get in our way,” he said in a speech last year. “Whatever executive authority I have to help the middle class, I’ll use it.”

The problem is that most presidential actions that could help significant numbers of middle-class workers do require congressional participation. But here’s one that doesn’t: raising the salary threshold for the exemption to the overtime rules of the Fair Labor Standards Act of 1938.

The act establishes that most workers, after 40 hours of weekly work, are entitled to be paid 1.5 times their regular wage — a.k.a., overtime. Hourly paid workers fall into this class, as do salaried workers who make less than a specified “threshold” amount. The idea is that employees in higher-status positions (executives, administrators, professionals) ought to be exempt from receiving the overtime premium.

But as with the minimum wage, which is not automatically adjusted for inflation and tends to lose real value unless it is raised, the overtime exemption threshold generally languishes. That means that many people who once would have been paid 1.5 times their wage when working overtime are not, violating the spirit of the law.

For decades, the Department of Labor periodically updated the overtime salary threshold. But today’s threshold, at $455 a week, is far below historical levels in real terms. And at just $2 a week more than a poverty-level income for a family of four, it is indefensibly low. I propose that President Obama raise the threshold to $970, equal in today’s dollars to the 1975 level of $250.

In keeping with the original purpose of the overtime rules, this increase would make overtime pay more expensive, creating an incentive for employers to spread work among other workers (an important goal in today’s low-job-creation environment). It would also more fairly compensate those who do work more than 40 hours.

Why do I suggest an updated 1975 value of $970? Because it would restore the proper relationship between the overtime salary threshold and today’s median wage. When the Ford administration raised the threshold in 1975, it was 1.6 times the median wage. Today’s median wage for 40 hours of work is about $670. Were we to update that value by the same 1.6 ratio that prevailed in the mid-1970s, we’d end up with a threshold above $1,000, suggesting that $970 is, if anything, on the low side.

At the same time, an updated 1975 value would still leave higher-status positions exempt from the overtime protection. According to data from the Bureau of Labor Statistics, the median weekly earnings for manager-supervisors in various occupations range from $1,520 to $3,995, well above my proposed threshold.

You might worry that raising the overtime salary threshold would dampen hiring by creating higher labor costs. But there are good reasons not to expect this outcome. Research suggests that employers have a rough idea of how much overtime they will need from a given hire and adjust the base wage down accordingly. This means that at least some part of the burden of an increased overtime premium falls on the worker. But more important, if employers want to avoid paying overtime, they have an easy way to do so: Hire new workers to do the extra work at the standard wage. (This, again, was one of the objectives of the original law.)

The overtime provision of the Fair Labor Standards Act is still a vital contributor to the well-being of millions of American workers, but it needs updating to live up to its potential. At the same time, for President Obama to carry out his pledge to help working people with or without Congress’s participation, he needs policy reforms that make a difference but don’t require legislative approval. Raising the overtime salary threshold would be a simple solution to both problems.

See more work by Ross Eisenbrey