New overtime rules right a wrong
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The federal law that governs eligibility for overtime pay has always excluded certain "executive, administrative and professional" employees from pay for hours worked over 40 in a week. For decades, this exemption for executives applied to employees that direct the work of two or more workers, hire and fire workers, regularly exercise discretionary powers, and do not devote more than 20 percent (40 percent in retail or service establishments) of time to activities that are not directly and closely related to exempt work. That is, the law intended to exempt from overtime pay only those highly paid employees who clearly spent the majority of their time in executive or managerial activities.

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This changed radically on Aug. 23, 2004, when President George W. Bush's Labor Department's new definition of "executive" employee went into effect. The new definition dropped the requirement that an executive employee must exercise discretion and radically reduced the amount of time an exempt employee had to spend in managerial or executive duties. Under the new definition, any salaried employee that spent as little 20 to 30 percent of their time doing managerial work could be classified as an executive exempt from overtime protections. Estimates at the time were that employers could move as many as 6 million workers from hourly paid to salaried and deny them pay for hours worked above 40 in a week.

The new overtime rules also increased the salary level for getting overtime pay from $8,060 a year (less than a minimum wage worker earned in 2004) to $23,660, but failed to index it to average wages or inflation, guaranteeing that it would cover fewer and fewer workers with every passing year. It covered just 8 percent of salaried workers in 2014, compared with 62 percent in 1975. Today, an annual salary of $23,660 ($455 a week) is below the poverty line for a family of four.

The 2004 changes to the overtime rules made it possible for employers to misclassify millions of workers as "executives" exempt from overtime pay. A promotion to "manager" for low-wage workers in retail or food service can lead to a smaller paycheck, as they no longer receive premium pay — or any pay — for working late at the cash register or getting ready for the next day's customers. The salary threshold for overtime pay is too low to protect these workers from losing overtime pay, no matter how many hours they are required to work. Even workers earning poverty wages can be denied overtime compensation if their employers classify them as exempt "executives."

The Obama administration is now seeking to remedy this perverse situation by adjusting the salary threshold for inflation. The Department of Labor has proposed raising the overtime salary threshold to $970 a week, or $50,440 a year for a full-year worker, and automatically updating it by linking it to the average wage or to inflation. The new threshold provides a bright line rule that assures that middle-income workers with limited discretion and few managerial responsibilities will be fairly compensated for the time that they work.

As economists know, and business consultant Fran Rogers recently observed, the incentives to overuse resources that are free are almost irresistible. Time is a limited and precious resource to most workers, but when everything over 40 hours for millions of employees is free to the employer, there is little incentive for employers to make efficient use of employees' time.

Restoring the right to overtime pay to millions of middle-income workers with few of the attributes of true executives will increase incomes and/or reduce the stress on working families, and will provide employers with incentives to more efficiently utilize their workforce.

Appelbaum is a senior economist at the Center for Economic and Policy Research and co-author of Private Equity at Work: When Wall Street Manages Main Street.