The Obama Administration’s new overtime proposal is an important and long overdue reform, but those who see it primarily as a way to address stagnant wages are missing the point. If the rule works properly, the main benefit will come in the form of time rather than money.
Noam Scheiber, the new labor reporter for the New York Times, exhibited the misconception in a news analysis arguing that the proposal “falls well short of helping substantially increase middle-class wages.” The piece compounded the problem by quoting Sen. Chuck Schumer calling the step “the middle-class equivalent of raising the minimum wage.”
Enacted in 1938, the overtime provision of the Fair Labor Standards Act (FLSA) is designed to discourage employers from compelling workers to work excessive hours. The time-and-a-half provision is meant not as a wage bonus but rather as a penalty for firms that overwork their staffs rather than increasing the headcount.
Under pressure from business interests, Congress wrote language into the FLSA providing an exemption from the overtime provisions for executive, administrative and professional employees. The rationale was that such persons would be paid a salary rather than a hourly wage, and their compensation would be high enough to make some extra hours tolerable.
It was left to the Labor Department to define exactly which employees would be covered by the exemption. It chose to set criteria that referred mainly to job content but also set a compensation level below which overtime had to be paid regardless of the nature of the job.
That latter provision turned out to be essential. It would be all too easy for an employer to give a position superficial managerial or administrative responsibilities with the aim of making it exempt from overtime. The problem was that the wage cutoff was set too low, and revisions tended to be slow in coming. After the cutoff was raised to $155 a week in 1975, it took another 29 years before it was increased again.
In the meantime, employers did everything possible to shrink the portion of the workforce eligible for overtime pay. This was perhaps most common in the retail sector, where workers were given bogus titles such as assistant store manager while most of their responsibilities were not managerial or administrative in nature. Once they were off the overtime clock, it was profitable for the real bosses to work them long hours.