Long-overdue overtime update will give boost to workers and economy

When Congress enacted the Fair Labor Standards Act (FLSA) in 1938 – which implemented a minimum hourly wage of 25 cents, banned oppressive child labor and put the maximum workweek at 44 hours – lawmakers began by making explicit why they were doing so.

Namely, that “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency and general well-being of workers” burden the free flow of goods, are unfair, lead to labor disputes, interfere with the orderly marketing of goods and cause such conditions to spread.

The law ends by declaring it would be government policy:

to correct and as rapidly as practicable to eliminate the conditions above .. without substantially curtailing employment or earning power… We need to bring those policies to bear now so that all people who want to work can find remunerative work and so that people and their families can live a human, humane and free life.

Hard to believe now, but the very basic worker protections included in the FLSA were controversial at the time, coming just a few years after the end of the Great Depression amid a still-shaky pre-war economy.

Times have changed, but in some ways things have also stayed the same, as the latest efforts to update the law are just as controversial as was passing the original almost 80 years ago.

Most recently, the Obama administration last month proposed increasing the threshold at which certain classes of worker are eligible for overtime pay, from US $23,600 to $50,440. The White House also proposed indexing it to inflation for now on as a sure way to prevent it from eroding in the future. These small changes are well within the spirit of the FLSA’s original intent of inclusiveness and are hardly radical.

In fact, the president’s overtime update will be a net win for most workers, families and the economy, even for our contemporary workplaces, by closing what had essentially become a loophole in the rules. Consider this: in 1975, the overtime threshold covered more than 60% of salaried workers. Today it’s estimated to cover no more than 8%.

The last time the threshold was updated was in 2004, when the Bush administration raised it to the $23,660 level, the first change since 1975, when it was just $8,060.

So President Obama’s overtime update is long overdue and will give a boost to millions of workers, many of whom don’t earn that much more than the official poverty line, thereby spreading the benefits of the economic recovery more evenly. It will also, in turn, likely give the recovery itself a bit more juice.

Gaming the system

When Congress first crafted the FLSA, it carved out an exemption from the minimum wage and overtime pay requirements for “executive, administrative and professional” workers because of their greater bargaining power and relatively greater autonomy in performing their jobs.

It is understandable that many employers have discovered they could utilize this exemption to minimize their current labor costs, particularly in hyper-competitive markets such as the retail sector. The employer can avoid not only the cost of overtime payments but also of monitoring and tracking these employees' weekly hours or searching for new hires to help when workloads are peaking.

However, its use has gone well beyond the exemption’s original intent of being for those who run parts of a company, have subordinates or the discretion to exercise independent judgment as a trained professional. Someone can be exempted currently if his or her salary is as low as $24,000 and has some managerial tasks considered to be a “primary” duty, such as locking doors or scheduling the work of a couple of subordinates.

In the words of University of Texas economics professor Daniel Hamermesh, one of the most respected labor economists who studies the impact of overtime rules:

It’s hard to believe that somebody making $30,000 is [truly] a supervisor… I don’t think even our regulations are in line with the original intent of the law [so raising the threshold] was an absolute no brainer.

Broad benefits for workers and the economy

The higher threshold will lead to more income for employees who once fell into that $23,660 to $50,440 range, either by getting compensated for the excess hours they currently work or with a boost to their salaries to put them above the new, higher threshold.

Alternatively, they may see their hours reduced to no more than 40 a week (though with no change to their overall salary level). That likely translates into a better work–life balance, offering more time for recreation, rest and recovery, education, caregiving and family time (no more missing your child’s baseball game).

Indeed, it might also improve employees' productivity and organizational performance if it reduces the extent that they are currently experiencing symptoms of overwork, such as fatigue and stress.

It is possible, on the other hand, that employers might adjust downward the wage or salary rates among those who now earn overtime pay, to avoid increases in their labor cost. However, this is likely to be gradual, at best, and perhaps counterproductive to employee performance and retention.

As Hamermesh and others have noted, “Americans now work more than any other country,” so the 5 to 15 million workers who will eventually benefit from this update will simply put us more in line with standards of living in other developed countries, something unfortunately the US labor market was not producing on its own.

Employers will no longer be able to avoid or delay hiring more employees by simply requiring the ones who were exempt from overtime to work longer hours. This subtle cost-shifting had placed the burden on an employee to work extra hours for no extra pay in exchange for a “promotion” in terms of title or status.

The economy as a whole will also benefit from this change as millions of workers suddenly have more take-home pay or more time to spend the money they have.

Potential downsides

Obama’s proposal carries some risks, however.

For one, if employers do react by lifting some employee salaries above the new threshold, they then remain exempt from the overtime rules and may still have open-ended work hours. However, the added labor cost would be minimal for those workers whose pay is very near the new threshold, and certainly less than the cost of paying them overtime if they do work substantial additional hours.

Companies might also react by tracking employee hours more meticulously (with state-of-the-art scheduling software) so that hours are kept to no more than 40. However, employers might shift many of the hours, workload or duties to other, existing or new part-time employees in the same store, office or shop. If sometimes they do not or cannot trim their hours accordingly, then their labor costs might indeed increase (unless productivity rises commensurately).

Indeed, some employers might even reduce such full-time to (one or two) part-time status positions, which are excluded from many of the employee benefits often offered to full-time workers only. However, this would translate into either more jobs created or more hours for part-time employees, many of whom are actually underemployed, hungry for more hours and income.

What the doctor ordered

The current economic recovery is not lifting wages nor salaries much at the middle rungs of the income distribution, and the new overtime rules could be just what the doctor ordered for what ails the US labor market.

Rising ratios of corporate profits, capital and executive compensation to other employee pay suggest the new overtime threshold can be tolerated with little risk of stifling investment in things like technology and R&D, particularly as companies use the extra cash they’re generating for stock buybacks and dividends. On the other hand, the extra cash in worker pockets will spur more consumer spending and increase income security for middle-class households.

My own preference, however, is that we pursue wholesale reform of the FLSA. Examples include revisiting the arbitrary 40-hour workweek level, facilitating more employee-centered requests for more flexible and predictable hours, curbing mandatory overtime practices and maybe even creating another category of employee between fully exempt and nonexempt.

The last option might serve to both curb and compensate additional work hours without creating such a steep “cliff” that could unintentionally deter employers from creating such jobs.

In the meantime, closing the loopholes and protecting those who have been subtly abused is good for those employees and the economy.

Lonnie Golden receives funding from the Economic Policy Institute