OKPOLICY.ORG
An earlier version of this post appeared in the Journal Record
For a long time now, hardworking, middle-class Americans have seen their wages stagnate, while the benefits of economic growth go mostly to the wealthiest. One reason for this trend is the erosion of hard-fought labor standards, such as the minimum wage and overtime protections.
Recently, the Obama Administration proposed a new rule aimed at restoring overtime pay for millions of Americans by raising the income threshold under which all salaried workers are eligible for overtime.
The requirement that most employees who work more than forty hours a week be paid at least time-and-a-half their regular rate of pay goes back to the Fair Labor Standards Act enacted by Congress during the Roosevelt Administration in 1938. As economists Jared Bernstein and Ross Eisenbrey explain in a brief that helped shape the Administration’s proposed rule, “The right to a limited workweek provides time for leisure, civic participation, commuting, self-improvement, and tending to family and work.”
Overtime rules have always allowed exemptions for certain categories of high-level salaried employees. To qualify for an exemption from overtime protections, employees must meet both a duties test and a salary test. The duties test, which applies to bona fide executive, administrative, and professional employees, along with outside salespersons, provides an exemption for employees who exercise substantial managerial responsibilities or who have special skills or training. The salary test is more straightforward and is based on the premise, as Bernstein and Eisenbrey explain, that “an employee’s salary level is itself an indicator of status, and that workers paid below a threshold salary level should be paid overtime, regardless of their duties.”
The problem is that in recent decades, the scope of the duties exemption for executive, administrative and professional employees has been widened, while the salary threshold, below which all employees are covered, has not been updated to keep pace with wage growth and inflation. Today, while most hourly workers are covered by overtime, salaried employees making over $23,660 per year can be exempt from overtime if their employer classifies their jobs as managers.
The result is that a steadily shrinking share of today’s workforce is covered by overtime protections. In 1975, nearly two-thirds of salaried workers earned less than the salary threshold, but by 2013, this had fallen to just over one in ten (see chart below). Today, the salary threshold is less than the federal poverty threshold for a family of four. Under today’s rules, a restaurant can avoid paying overtime to an employee classified as an assistant manager who works 60 hours a week and earns less than $30,000 a year, even if the employee spends most of her day as a cook and cashier.
The Administration’s proposed rule sets the salary threshold under which all employees must be paid overtime at $970 per week, or $50,040 per year. This is more than double its current level but exactly where it would be if the 1975 threshold had simply been adjusted for inflation over the past three decades. The new threshold would be about 1.5 times the median wage, as it was in the mid-1970’s, and would remain well below the median weekly earnings of workers in management occupations with supervisory duties, according to the latest government data. The Administration also proposes to index the threshold to either inflation or wage growth to ensure that workers continue to be protected. A final rule will be announced after a 60-day comment period.
The new rule would extend overtime protections to some 4.7 million workers nationally, especially benefiting women and those with a college degree, according to figures from the U.S. Department of Labor. In Oklahoma, an estimated 70,000 workers, or 4.4 percent of the total workforce, would benefit, which is the highest share of total employed of any state.
How employers will adjust to the new rule is not clear. Some employers may bump up workers’ salaries to keep them exempt from overtime. Once the rule takes effect, employers could lower starting salaries for new employees to take into account higher overtime costs or reduce workers’ hours to avoid paying overtime, which could in turn lead to an increase in hiring of additional workers (see the discussion on pp. 11-12 of Bernstein and Eisenbrey’s paper).
As President Obama stated in announcing the new rule, “In this country, a hard day’s work deserves a fair day’s pay. That’s at the heart of what it means to be middle class in America.” Modernizing overtime protection is an important step towards strengthening the security of middle-class workers and creating an economy that works for everyone.
