Stars and stripes. Apple pie. The forty-hour workweek.
The United States is home to many cultural innovations—we’re the people who brought the world the Beefy Fritos Burrito, the iPhone, and the ability to order a Beefy Fritos Burrito via iPhone—but perhaps no convention is more American than working Monday-to-Friday, nine-to-five.
It’s as predictable as it is grinding, but it’s our patriotic duty—a rite of passage affirmed with every punch out. We may not always love the relentless weekly grind, but it’s a routine we respect. We’re Americans. We work 2,400 minutes a week.
Except for one thing: like most caricatures, the forty-hour workweek comes with a caveat. Many of us work (a lot) more than that. Which is precisely why you ought to care about the new overtime rules President Obama announced yesterday.
Red, White, and Tired: America’s Real Work Schedules
According to the Bureau of Labor Statistics, more than a quarter of the workforce puts in over forty hours a week. The average, in fact, among full-time workers is 42.5 hours. And according to a report by Gallup, even those statistics might be lowballed; among full-time workers, Gallup found that the average workweek was forty-seven hours, and that half of respondents spent more than forty hours on the job.
You might think this a good thing, assuming that if some work is good, more work is better; that it’s a testament to character, a pathway to a bigger paycheck and a higher standard of living.
More hours can mean these things. But they can also be evidence of exploitation, when workers are forced to work unusual or excessive hours involuntarily. Extra hours can also exact a toll on those who don’t get them—chief among them, the unemployed. Forcing existing employees to take on more work is a tried-and-true way for employers to save on training, recruitment, and benefit costs—and, in the process, to suppress job growth. Too much work can be as painful as no work, and both extremes are the inevitable result of unwanted overtime.
And that’s exactly why the federal government has enforced overtime protections for more than seventy-five years.
We Have Overtime Rules?
The forty-hour workweek is no accident. It’s a standard that has been set in law since the Fair Labor Standards Act (FLSA)—the law that created the minimum wage—was passed in 1938. Although the minimum wage usually gets most of the attention, the FLSA was equally concerned about the twin dangers of underpay and overwork. Under the Act, workers are entitled to time-and-a-half pay for any hours over forty that they work in a week. In other words, you have a legal right to overtime.
But there’s a catch. Some workers are exempted from this safeguard. The largest such exclusion pertains to “executive, administrative, and professional” employees. The logic of this so-called “white collar” exemption, (which also extends to outside salespeople and computer employees), is that individuals in high ranking positions have access to workplace perks, including high pay, better benefits, and decision-making authority, which render overtime protections unnecessary. When you’re highly skilled or calling the shots, it’s a good bet you exert some control over your schedule—or at least are duly compensated for the hours you’re putting in.
So What’s the Problem?
It’s a well-meaning exception, but, unfortunately, like many aspects of three-quarters-of-a-century-old labor laws, it has a tendency to struggle in keeping up with the times. Since the 1940’s, “white collar” employees have had to satisfy a three-part test in order to be exempted from the guarantee of overtime pay. They must have bona fide executive, administrative, or professional duties (for example, managing staff or exercising independent decision-making authority), they must receive a regular salary, and—and this is the key part—that salary must be above a certain level, under the reasonable assumption that pay is correlated with workplace status.
Historically, the salary threshold has been set high enough to make meaningful distinctions between true managers and those with only facially supervisory roles. According to the Department of Labor (DOL), which promulgates and enforces FLSA standards, the salary test is the “single best” indicator of white collar status. In 1949, all workers earning less than $52,000 annually (in 2015 dollars) were entitled to overtime protections; by 1975, the threshold had reached $57,500.
And today? The white-collar salary level is just $23,660, where it’s been fixed since 2004 (between 1975 and 2004, the real value of the threshold shrunk to roughly $16,400, due to inflation). That’s right. For purposes of overtime protections, $455 a week is enough to classify a worker as an executive. If you’re keeping score, that’s less than the poverty line for a family of four.
To make matters worse, recent years have seen an accelerating white-collarization of the labor force as workers upgrade skills, technology advances, and more jobs shift from making things to providing ideas and services. And it’s far easier for employers to fudge job duty descriptions than it is to misrepresent dollars and cents.
So if you didn’t realize you might be eligible for overtime, you’re not alone; the quiet encroachment of the white collar exemption has effectively eviscerated this critical safeguard. (Note, some professions, including doctor, lawyer, and teacher, are not subject to the white collar salary test and are exempt from overtime protections altogether.)
But that all that has now changed. At President Obama’s order, DOL has issued a Notice of Proposed Rulemaking, soon to be published in the Federal Register, which will modernize and simplify the white collar rule and restore overtime guarantees for the workers the FLSA was intended to protect.
What Do The New Rules Accomplish?
DOL has proposed a salary standard set at the 40th percentile of earnings for full-time, non-hourly workers. More concretely, the salary threshold is expected to be $50,440, or $970 per week, in 2016, when the new rules will likely go into effect. Concomitantly, DOL will raise an complementary threshold—the so-called highly-compensated employees (HCE) exemption—from $100,000 to $122,148 (or to the 90th percentile of earnings). Consistent with the regulation’s “pay equals status” philosophy, workers making above the HCE standard are exempted from overtime pay under a less stringent duties test.
These thresholds were carefully chosen to balance simplicity and coverage. Set at the 40th percentile, the white-collar salary level is high enough so that most truly non-executive staff are protected, without casting an overly broad net: the standard is still lower than the historical norm. Significantly, an appropriately robust standard also mitigates the need for a more rigorous duties test, making it easier to understand and comply with the law. The duties test was, until 2004, longer and more complicated, but the recent rule changes maintain the simplified test.
Equally important, DOL will automatically update these salary thresholds each year to account for wage and price inflation, in order to ensure that the protections remain stable over time—a key element that is missing from existing law. The updates will be indexed to the 40th/90th earnings percentiles or the Consumer Price Index; the choice will be based, in part, on the comments the DOL receives about the proposed changes.
Who Does It Affect?
The United States is home to roughly 144 million wage and salary workers (that is, those who aren’t self-employed or unpaid), of whom DOL estimates 21.4 million hold salaried, white-collar jobs that may be impacted by the new rules.
In the first year of implementation, DOL expects 10.9 million workers to be directly affected. Of these, 4.6 million earn more than the existing $23,660 salary threshold, but less than the new $50,440 one, and they thus would become eligible for paid overtime. The remaining 6.3 million workers who will be affected by the change are currently earning above $23,660 but are entitled to overtime under the duties test; they would see their safeguards fortified by the weight of an appropriately updated bright-line salary standard.
Then again, these estimates do not account for changes in employer behavior. Some firms may reduce hours to avoid paying overtime. In some cases, this may result in an unwanted reduction in earnings for some employees, although this loss must be weighed against the probable expansion of employment opportunities for the unemployed, as well as the benefits of reductions in forced overwork.
How Much Will It Cost?
DOL’s impact analysis estimates that the new rules will cost employers $240-$250 million annually over the next ten years, primarily due to the regulatory familiarization, adjustment, and management costs associated with implementing and adapting to the changes. (Remember, too, that every dollar spent is a dollar in income for someone else, which ultimately benefits some worker.)
Much larger, however, will be the $1.2-$1.3 billion that will be transferred from employers to employees annually, which represents a non-trivial boost to the livelihoods of benefitting workers. Of course, such enhancements to employee well-being are precisely the point of the rules update; and perhaps larger still are the non-monetary benefits associated with more predictable, reasonable work hours.
By contrast, DOL estimates that the deadweight loss—the market inefficiency generated by government intervention—from the policy will be just $10 million. That’s a small price to pay for worker benefits that are orders of magnitude larger.
The Notice of Proposed Rulemaking will be published shortly in the Federal Register, after which the public will have 60 days to comment. DOL will then review the comments and issue a revised Final Rule, which will be subsequently be reviewed by the Office of Management and Budget and again published in the Federal Register before becoming effective.
There’s a lot of work ahead to be sure, but it’s a good bet the administration will make every effort to make the new rules law before President Obama leaves office—even if doing so requires working some overtime.