Testimony | Wages, Incomes, and Wealth

Narrowing the white-collar exemption to minimum wage and overtime for low-wage workers in Maryland is a critical protection for hundreds of thousands of Maryland workers: Testimony of David Cooper before the Maryland House of Delegates Economic Matters Committee in support of HB 1040

Chairman Davis, Vice Chairman Bromwell, members of the committee, thank you for allowing me to speak with you today. My name is David Cooper. I am a senior analyst at the Economic Policy Institute (EPI) in Washington, D.C. EPI is a nonpartisan, nonprofit research organization whose mission is to research, develop, and advocate for public policies that help ensure the economy provides opportunity and fair rewards for all Americans, with a focus on policies to support low- and middle-income households.

I am here to support the enactment of HB 1040, which would close a loophole in Maryland’s wage and hour laws that exempts many lower-paid managers and administrative workers from overtime pay when they work more than 40 hours per week. Importantly, this loophole would also exempt many of these same workers from the minimum wage if the state raises its minimum wage to $15, as I know this body has already passed legislation to do. I will explain in detail.

Maryland law tracks federal law, specifically the Fair Labor Standards Act, the federal law that establishes the federal minimum wage and requires that employers pay a penalty (time-and-a-half overtime pay) when they require their employees to work more than 40 hours in a week. Before the FLSA became law in 1938, factory workers and office clerks often worked 60 or more hours a week, sometimes at miserably low pay.

From the beginning, the FLSA’s overtime protections covered both production workers and many white-collar workers, from shipping clerks and typists to bookkeepers and accountants. Congress recognized that white-collar workers need time away from work just as much as blue-collar workers do.

But the federal law—as well as the Maryland statute—does have an exception for salaried higher-paid, higher-status, higher-responsibility positions that Congress and the U.S. Department of Labor (U.S. DOL) thought did not need the law’s protection. Bona fide executives, administrative employees, and professionals (EAP) were made exempt from both the overtime rules and the minimum wage. Under DOL regulations, to qualify as one of these EAP employees, an employee must hold certain duties—pass the “duties test”—and be paid on a salary basis at or above a certain threshold—pass the “salary test.” If a salaried employee is paid less than the salary threshold, the employee is eligible for the minimum wage and overtime regardless of job responsibilities. If the employee is paid at or above that salary threshold, he or she must then also pass the duties test to be exempt from the minimum wage and overtime requirements.1

Since the FLSA’s passage, the salary threshold has been part of the definition of bona fide exempt executive, administrative, and professional employees. But from 1975 until 2016, the U.S. DOL let the value of the salary threshold erode to its current ridiculously low level of $455 per week—the equivalent of $23,660 in annual pay. That is less than the federal poverty line for a family of four and in no way reflective of executive or professional compensation. Because Maryland law has tracked federal law, it is just as obsolete. In 1975, more than 60 percent of full-time, salaried workers nationwide were automatically eligible—based on their salary alone—to receive overtime pay if they worked more than 40 hours per week. In 2016, less than 7 percent nationally met that threshold.2 The share is about 8 percent in Maryland as of 2018.3

This enormous erosion of the salary threshold presents a serious problem for many Maryland workers. Under current law, a line manager at a fast food restaurant or a discount retailer being paid a salary of just $455 per week—that’s $23,660 annually—could be required to work 50, 60, 70 or more hours a week for no more pay than if they worked 40 hours. This exemption means that they are not legally entitled to any additional pay for the extra hours in excess of 40 per week, let alone time-and-a-half.

The potential for abuse made possible by the ridiculously low threshold will become even more acute with a higher state minimum wage. A pay rate of $455 per week for 40 hours of work is equivalent to $11.38 per hour. If the state minimum wage is raised above $11.38 per hour—as I know this body has voted to do—those same lowly paid and only nominally “managerial” employees would also be effectively exempt from the new minimum wage. An employer could assign token managerial responsibilities to a full-time staff person and the employer would then only need pay the worker $455 per week—again, the equivalent of only $11.38 per hour for a 40-hour workweek. If that employee had to work more than 40 hours, the effective hourly rate paid would be even lower.

There is no reason why someone with a job title that includes the word “manager”—but whose job primarily involves performing the same tasks as front-line staff—should be exempt from the same overtime and minimum wage protections afforded those front-line workers unless he or she is being fairly compensated.

HB 1040 would raise the statutory salary threshold exempting professional, administrative, and professional employees to $900 a week, the equivalent of $46,800 annually.

This is an incredibly important, yet arguably very modest, reform. In 2016, the U.S. Department of Labor finished a rulemaking to raise the FLSA’s salary threshold for exemption to $913 per week or $47,476 on an annualized basis.4 After DOL finalized its rule to raise the exemption threshold, a court in Texas blocked the department from implementing it.5 The Trump administration has since indicated that it intends to issue a new rule with a much lower threshold.6 Had the 2016 rule been implemented, this problem of severely eroded overtime protections for lower-paid managers and administrative workers would already be solved. But as is often the case, state lawmakers must now step in to fix a problem caused by decades of federal inaction.

By raising the threshold to $900 a week, HB 1040 would extend new overtime protections to approximately 70,000 salaried employees in Maryland, setting the threshold at a point that would cover roughly 24 percent of Maryland’s full-time salaried workers.7

Without a clear and appropriate threshold, many low-level employees—such as assistant managers in retail stores or fast food restaurants—can legally be denied the minimum wage and overtime pay by their employers. The DOL rulemaking record is full of stories of employees working 60 or 70 hours a week without any extra compensation for their long hours. HB 1040 would say that no one paid less than $46,800 a year should work more than 40 hours a week without getting paid time and a half for the extra hours, and they must receive at least the minimum wage for all hours worked.

Setting an appropriate threshold also brings needed clarity to the rights of employees who are already covered and to the duties of their employers. Many salaried employees paid above the current $455 per week threshold are entitled to overtime pay because their primary duties are not executive, administrative, or professional. Employees who are entitled to overtime protection because they don’t meet the duties test for exemption include workers in scores of occupations, from paralegals and postdoctoral researchers to dental assistants and copy editors. Most bookkeepers are entitled to overtime pay, for example, but many do not know it, and neither do their bosses. With a $46,800 salary threshold, at least the employees paid less could be sure of their rights. Altogether, there are about 219,000 salaried employees in Maryland who would have their right to minimum wage and overtime protections established or clarified by a higher threshold. The demographic characteristics of these affected workers, and those who would be newly protected, are listed Table 1.

Table 1

Characteristics of Maryland workers who would be affected by establishing $900 per week as the salary threshold for the “white-collar exemption” to minimum wage and overtime protections

 

Total salaried workers Workers with new protections Workers with strengthened protections Total affected workers
All 1,352,200 69,500 149,000 218,600
Gender
Men 722,300 34,900 73,500 108,500
Women 629,900 34,600 75,500 110,100
Race/ethnicity
White, non-Hispanic 827,100 44,100 75,300 119,400
Black, non-Hispanic 298,400 13,400 38,800 52,200
Other race or ethnicity 226,700 12,000 35,000 47,000
Age
Ages 16–24 61,400 8,900 13,100 22,000
Ages 25–34 293,900 23,800 40,500 64,200
Ages 35–44 304,400 11,600 34,200 45,700
Ages 45–54 358,200 11,200 34,500 45,700
Age 55 or older 334,200 14,100 26,800 40,900
Educational attainment
High school or less 216,300 10,300 53,900 64,300
Some college 242,700 17,500 43,000 60,500
College degree 444,300 27,000 38,300 65,300
Advanced degree 448,900 14,700 13,800 28,500
Parental status
Not a parent 867,200 52,300 102,100 154,400
Father 273,400 9,200 24,300 33,500
Mother 211,600 8,100 22,600 30,700

Notes: The "white-collar exemption" exempts executives, administrative employees, and professionals from eligibility for overtime (time-and-a-half for hours worked in excess of 40 in a week) and the minimum wage. Workers with new protections are those who would not have been eligible previously because they had some managerial duties, but are paid between $455 (the current salary threshold) and $900 per week. Workers with strengthened protections are those who are paid between $455 and $900 per week and have no managerial duties, thus they should have been eligible already.

Source: Economic Policy Institute analysis of Current Population Survey microdata

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In addition to complying with the minimum wage law, some employers will have to adjust to the increased overtime eligibility of some of their staff. There are several ways through which they could adjust to the new overtime pay requirements:

  1. They can raise employee salaries above the threshold if they want to continue working employees more than 40 hours a week without paying for or keeping track of overtime.
  2. They can reduce the hours of overworked employees and share the employees’ workloads with other employees. For example, an assistant manager who now helps stock shelves and clean floors, adding 20 extra hours to her work week without any extra compensation, can have that work assigned to part-time employees, who will benefit from the extra hours and pay.
  3. They can pay overtime for the extra hours put in by employees whose salaries are too low to raise above the threshold.
  4. They can manage time more efficiently, avoiding late-in-the-day meetings, for example, and demand that employees complete their weekly tasks within 40 hours.

For many years, other states have set their own salary thresholds rather than rely on the U.S. DOL. And several states have recently announced they are updating their salary thresholds as well. California sets its threshold at twice the state minimum wage, which is set to go to $15 an hour in 2022. The threshold is currently $960 a week ($49,920 annually), and will rise in steps to $62,400 annually by 2022 (2023 for small employers).8 New York sets its threshold at 1.875 times the minimum wage. The threshold is currently $1,125 a week ($58,500 annually) in New York City, $832 a week ($43,264 annually) upstate, and $900 a week ($46,800 annually) in the NYC suburbs. The thresholds will rise to $58,500 in the suburbs and $48,750 upstate by the end of 2020.9 Pennsylvania announced last year that it too will raise its overtime threshold to $47,476 annually (or, $913 a week)—matching the 2016 DOL rule.10 The executive branches in Washington State, New Jersey, and Colorado also have all indicated that they intend to raise their state salary thresholds.

HB 1040 is an essential correction to a serious loophole in state law and a critical element of this legislature’s desire to raise pay for low- and middle-wage workers in Maryland. HB 1040 would help restore one of the core labor standards—the right to overtime for excessive work hours—that protected workers in the United States prior to the wage stagnation and growing inequality that plague our economy today.

I strongly urge you to enact HB 1040, not only to restore basic overtime protections that should have been maintained at the federal level, but also to preserve the integrity of the minimum wage increase that this legislature has recently passed.


1. U.S. Department of Labor, Wage and Hour Division, “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Acts (FLSA),” revised July 2008.

2. Celine McNicholas, Samantha Sanders, and Heidi Shierholz, What’s At Stake in the States If the 2016 Federal Raise to the Overtime Pay Threshold Is Not Preserved—and What States Can Do About It, Economic Policy Institute, November 2017.

3. Economic Policy Institute analysis using Current Population Survey microdata.

4. U.S. Department of Labor, Wage and Hour Division, “Final Rule: Overtime,” revised January 2018.

5. Ross Eisenbrey, “Ruling Against Overtime Is Wrong in So Many Ways,” Working Economics (Economic Policy Institute blog), November 30, 2017.

6. Heidi Shierholz, “The Trump Administration Wants to Prevent Millions of Workers from Getting Paid Overtime” (statement), Economic Policy Institute, February 28, 2019.

7. Economic Policy Institute analysis using Current Population Survey microdata.

8. State of California Labor Code, Section 515.

9. New York Department of Labor, “Executive Employee Overtime Exemption Frequently Asked Questions (FAQ).

10. Office of Governor Tom Wolf, “Governor Wolf to Modernize Outdated Overtime Rules to Strengthen the Middle Class and Provide Fairness for Workers” (press release), January 17, 2018.

 


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