Why is there any income limit on overtime regulations?

President Obama last week expanded federal rules requiring American employers to pay overtime. In the press release the President said “So we’re going to update those overtime rules to restore that basic principle that if you have to work more, you should be able to earn more.”

What this means is that businesses that could formerly pay fixed salaries to some managerial workers earning over $23,660 will now be forced to comply with federal overtime regulations on workers earning perhaps as much as $50,000 per year.

But if this is a “basic principle” shouldn’t it apply to everyone? Los Angeles pays firefighters overtime though the average total compensation is close to $250,000 per year (article; cash pay was $142,000/year but they also get benefits including a pension starting at age 50 of 90 percent of their previous income).

Let’s consider Cameron Kennedy, a working mom featured in this Washington Post story. McKinsey pays her $350,000 per year, presumably a fair wage for her skills. If they make her work more than 40 hours/week because they don’t want to hire another $350k/year worker, why shouldn’t McKinsey pay her overtime? Hasn’t she earned it as much as anyone else who has worked more than 40 hours?

If it makes sense to impose a “basic principle” from Washington, D.C., what is the rationale for an income cap?

[And separately, can companies evade these new regulations by limiting workers to 40 hours/week?  Suppose that Business A has someone working 60 hours/week and getting paid a straight $10/hour = $600. Meanwhile Business B has an identical employee. Under the new regulation Business A would have to pay 40*$10 = $400 plus 20*$15 = $300 or $700, right? But couldn't the companies agree that they will swap these workers for the last 20 hours/week? So now there is no worker who works more than 40 hours/week. People are probably at their most efficient for the first 30 hours per week on a job, so wouldn't we expect a reshuffling of the workforce so that no company employs a person for more than 30 hours per week? Then employers don't have to provide health insurance under the Obamacare laws and they also don't have to pay overtime under the new overtime regulations.]

23 Comments

  1. Neal

    March 17, 2014 @ 8:37 pm

    1

    An OT cap seems inconsistent with something Obama considers a “basic principle” yet Obama still supports a policy with such a cap. Not surprising since all policy emerges from political compromise.

  2. Jeffrey Friedl

    March 17, 2014 @ 8:37 pm

    2

    Seeing it only in the context of your post, I don’t understand the President’s comment about “work more, earn more”. Do the current regulations (that apparently need to be updated) require hours beyond 40 per week to be unpaid? The last I gave it any thought, if you worked an extra hour and got paid the extra hour, you “worked more, earned more”, even if the 41′st hour’s pay was the same as the first hour’s pay.

  3. paul kramarchyk

    March 17, 2014 @ 9:50 pm

    3

    Many companies require salaried employees to work ‘mandatory’ unpaid overtime (usually 10 hours a week). Regardless of whether the time is billable or not. I worked for a global energy company with this policy. Few questioned it. Isn’t that what it means to be an “exempt employee?” (Exempt from the Fair Labor Standards Act.)

  4. Martin Barry

    March 18, 2014 @ 3:57 am

    4

    There is perhaps a presumption that those on lower wages have less power to either negotiate a contract without unpaid overtime or refuse to work unpaid overtime in breech of contract.

    In your hypothetical scenario of course it makes sense for companies to cap hours so no overtime is worked but that does not take into account niche skills and a need for flexibility.

  5. Brian Gulino

    March 18, 2014 @ 8:08 pm

    5

    Its certainly abused in the STEM fields. Scientist are encouraged to “love science” so much that they put in 60+ hours per week. Computer programmers are encouraged to “pull together for the team” during the crisis, but somehow the crisis never ends. Throw in a few people with H1-B visas who are afraid of being deported if they don’t work 60 hours a week and you have your typical Southern California high-tech company.

    Best to work for civil service, a university, or for yourself.

  6. Larry Gebhardt

    March 18, 2014 @ 11:06 pm

    6

    Brian, I’m not sure working for yourself is the answer. I probably work 50 to 60 hours for myself every week. If this applied to me I would need to cut my pay so I could then pay the overtime.

    This is just one a number of laws that are unfair to people making above a certain amount. Why should the ROTH IRA have an income cap to be able to participate? Why should the tax credits for children have an income cap?

  7. philg

    March 18, 2014 @ 11:19 pm

    7

    Martin: People on “lower wages have less power”? Well, then hardly any of us have any power. Sheryl Sandberg has made nearly $1 billion during her years as a Facebook employee. Fortunately for the shareholders nearly everyone else there is earning “lower wages”. It sounds nice to get paid $350,000 per year but that is a rounding error compared to what top executives earn at a lot of companies. Why should a $350k/year worker not get 1.5X overtime if she is working to help the CEO clear $25 million?

    Paul, Brian: I think you are proving my point that fair is fair! Also think about the children of the person who has been officially deemed “high income” by the government. They would be a lot happier if their parent worked 30 hours/week instead of 60 or 80 (and consequently being driven around in a 10-year-old Accord instead of a new Mercedes or BMW SUV). So even if the government doesn’t need to act to protect the worker maybe it should act to protect the children of the worker, no?

  8. philg

    March 18, 2014 @ 11:20 pm

    8

    A reasonable goal: http://www.despair.com/effort.html

  9. Martin Barry

    March 19, 2014 @ 5:53 am

    9

    @philg well I think any employee’s bargaining power sits on a spectrum from the powerless earning minimum wage up to CEOs telling everyone else how it is.

    The federal overtime regulations appear to try to define a threshold where some kind of balance may lead a to fair negotiation of any employment contract and an employee assertive enough to hold their employer to that contract.

    Given that there is probably no way to accurately calculate what level of salary indicates a shift in the balance of power, any figure is likely to be seen as arbitrary.

    But I think you would agree that if someone earning $350k/year feels they deserve overtime pay they are in a much better position to demand it than someone on minimum wage or even $50k/year.

  10. philg

    March 19, 2014 @ 11:21 am

    10

    Martin: I don’t think it follows that high-paid people have more “bargaining power.” Consider a federal government worker. He is, on average, paid 2X as much as his private sector counterpart (http://www.downsizinggovernment.org/overpaid-federal-workers ). If his boss threatens to fire him, therefore, he is facing a 50% reduction in family income (assuming that he can’t find another government job). As Brian notes above, an H1-B worker, though paid reasonably well, may reasonably fear deportation if he doesn’t do whatever the employer demands.

    A $10/hour employee of McDonald’s, however, can get a $10/hour job at Burger King across the street.

    Put another way: If you were drawing a $350,000/year salary from McKinsey for producing PowerPoints would you feel comfortable storming into the boss’s office and telling her that you weren’t going to work over the weekend unless you were paid time-and-a-half overtime?

  11. Martin Barry

    March 19, 2014 @ 11:48 am

    11

    @philg I think you are being slightly disingenuous. It doesn’t matter that there are multiple employers offering $10/hour burger flipping jobs if the employees at all of the companies are not in a bargaining position to demand all overtime be paid. That’s why there are labour regulations, to protect from exploitation those unable to defend themselves.

    Your hypothetical government worker and McKinsey consultant are in a much better position to determine their hours vs salary. If they believe that the hours they are working are not being fairly compensated they can fight back, either through independent negotiation or joining a union. It’s not always going to be the case they will get what they want but it’s a fairer fight. If they don’t like the outcome perhaps they can flip some burgers for a bit and decide if that suits them better.

  12. philg

    March 19, 2014 @ 12:36 pm

    12

    Martin: If Person A works for Employer X by definition Employer X has more money than Person A, right? Otherwise why would Person A be an employee? The McDonald’s franchise owner has more money than the cashier at a McDonald’s. Similarly the McKinsey partnership has more money than the $350,000/year employee. There is no evidence that the ratio in wealth disparity is greater for the McDonald’s worker versus the McDonald’s franchise owner compared to the situation for Cameron Kennedy at McKinsey. Cameron Kennedy pays taxes (except on the $300,000/year that she is hoping to get as child support from Peter Orszag!). Why isn’t she entitled to federal regulatory protection to help her with the unequal bargaining power situation that exists at McKinsey?

  13. SenorP

    March 19, 2014 @ 5:23 pm

    13

    If you’re making $10/hr flipping burgers, you would have to save the entirety of 5-15 years wages to bring a lawsuit. No adjustment in lifestyle would make this feasible. Plus, they’d be battling over an amount of money which is a tiny fraction of the cost of the battle. However, the person making $350k has the means to fund a competent lawsuit if they feel they are being exploited. That’s why regulation favor those at the lower end of the wage scale.

    Most people don’t realize the magnitude of what it costs to hire a decent lawyer and exercise their rights under the law. Most of the laws we have are meaningless unless you have the funds to enforce them, which leaves out most Americans. God may have given us the rights, but he/she sure isn’t footing the bill to apply them.

    Companies have taken to game everything right to the edge, including “maximizing” employee “production.” You yourself pointed out some of the craziness associated with commuter pilot scheduling and the odd pre-work travel requirements, etc. Doctors work long shifts which tire them out and effect their work performance. Many salaried workers face pressure to work more hours which is rarely honestly disclosed prior to employment. Big silicon valley firms conspiring to keep wages down. Why? Because it makes sense for companies. Everything produced and sold whether a product or service has human input. Margins. And, they’ll do it for exactly as long as they can, however they can. That’s why there are unions and regulations, which are prone to be gamed as well.

  14. philg

    March 19, 2014 @ 5:28 pm

    14

    SenorP: By “bargaining” I hope that people were talking about negotiation, not litigation. If an employer is violating an actual law, that’s not really part of “bargaining” and the employee, at least in many states, need not bring a private lawsuit but rather can often get the government to enforce the law for him/her. If your argument is that lower income people cannot get access to any legal remedies and their employers can therefore do whatever they want then it really doesn’t matter what regulations are promulgated by our government, from the perspective of a lower income employee (since an employer could read your blog comment, realize that none of its employees would ever be able to afford a lawyer, and then ignore the regulations).

    [Employment law affords strong enough protections, e.g., with no statutes of limitations, that a lot of contingent fee attorneys get excited about these cases. I know a family that hired an illegal immigrant nanny and paid her $500/week in cash plus gave her a car to use. After six years the nanny found an attorney to sue the family with the argument that there was in fact an oral agreement that she be paid $900/week. So the nanny and the lawyer will potentially split $400/week times 6 years ($125,000) plus interest and penalties if they can convince a judge that there was in fact an agreement for a higher wage. My point with this story is that even someone you might not expect to have access to legal services can in fact get a contingent-fee attorney who is attracted by the more or less unconditional nature of employers' obligations to employees.]

  15. SenorP

    March 19, 2014 @ 6:44 pm

    15

    Phil, the gameification and exploitation which is attempting to be addressed by this new regulation, didn’t fall under your black/white labor laws. The government labor organizations you are referring to are fantastic and swift if you haven’t been paid, for example. Things like exploiting “exempt” employee status aren’t so cut and dried. Or, things like screwing with stock options. Companies have HR departments which are educated on how to skirt the laws, and they know which ones do and don’t have grey area. Private lawsuits are necessary in my experience as most exploitation falls in the grey area, not black and white. And of course, companies are prone to settle and sweep everything under the rug while maintaining the status quo for themselves. I have experience in this specifically. The lawyers all got paid, employees got pennies on the dollar for their exploited hours, and the company gets to keep exploiting workers while eliminating any liability for the time period covered in the lawsuit.

    Your acquaintances presumably blatantly broke the law by paying their nanny under the table. They gamed the system for their gain, which may have had the effect of driving down the wages and market for nannies who worked and got paid legitimately. Not to mention those who suffered as a result of decreased tax revenue. Now, that’s come back to bite them. The nanny and lawyer in this case, have gamed the system for themselves.

  16. Martin Barry

    March 20, 2014 @ 1:50 am

    16

    @philg it is not the salary/wealth disparity between the employer and employee that is important. You only have to focus on the salary of the employee. Why would McKinsey pay $350k/year if someone else would do it for $200k? Because the more expensive person has skills, experience or contacts that make them valuable. There is a limited supply of those people so they get to earn $350k/year instead of minimum wage and when negotiating that contract they can include a clause about overtime.

    Those earning minimum wage by definition had none of these bargaining chips and the employer is paying them the least they are legally allowed to. There is up to 7% of the population that could do the job instead if they happen to live nearby and want to work.

  17. philg

    March 20, 2014 @ 11:17 am

    17

    Martin: You raise a good point. People who earn minimum wage are not getting a market-determined wage. So in theory they are in the same position as government workers where they would suffer a lot of damage by losing their job. But that’s an argument for limiting employment law protections to those who earn only minimum wage, right? If a person is getting 25 percent more than minimum wage it means that the employer couldn’t find a big pool of qualified diligent people and had to offer more compensation.

  18. Martin Barry

    March 20, 2014 @ 6:14 pm

    18

    @philg the employment market is a spectrum from minimum wage right up to gold-plated toilet seats. The distribution of people within that spectrum follows a power law with the majority down the lower salary end. A persons location on that curve is dictated by a combination of skills, experience, contacts and/or location. At the high salary end market forces take care of clearing who earns what, how hard they work etc.etc. But at some point as you move back towards the lower salary end the market falters and fails as employers have too much bargaining power. Earning more than minimum implies a smaller pool of workers and/or specific frictions making replacing them uneconomic (e.g. training, relocation). Along with the higher the salary, the higher the other benefits including not just 401k or health care but also more say in working hours, flexibility, leave etc.etc. At the low end I think we can agree that a little help from government regulations will help a lot of people at minimal cost to their employers. At the high end we can agree they can fend for themselves. It’s just not clear where the crossover point is? Was $20k/year too low? Is $50k/year too high (or low)?

  19. philg

    March 21, 2014 @ 12:51 am

    19

    Martin: What’s your evidence for market failure? That some Americans don’t get paid a very high wage? Why isn’t that just evidence for “When the market gives you an answer that you don’t like, declare market failure”?

  20. Martin Barry

    March 21, 2014 @ 5:43 am

    20

    @philg Employment regulations are an admission of market failure much like anti-trust laws are an admission of market failure. A “market” requires elements of competition and negotiation so that products/services are provided and priced appropriately. A employee on relatively low wages is “replaceable” and hence the employer has monopoly like powers on setting wages and conditions of employment. These jobs are offered on a “take it or leave it” basis. Those earning only slightly above minimum wage only have a little more leverage because of the “frictions” previously mentioned. This market failure is why unions exist, why governments regulate, to rebalance power back towards the employee or limit the actions an employer can take given a persistent imbalance.

  21. philg

    March 21, 2014 @ 11:17 pm

    21

    Martin: Well I just wish you would let me into your secret employer’s club where we can collude to pay workers less. I would rather pay someone minimum wage than the 2X-3X minimum wage that seems to be the going rate for unskilled labor here in the greater Boston area.

  22. philg

    March 22, 2014 @ 12:17 am

    22

    Folks who think that companies are exceptionally good at exploiting low-wage workers: If it is true that workers who earn lower wages are more easily exploited, wouldn’t we expect to find that the most profitable/valuable businesses are those that pay close to minimum wage? http://en.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization shows the 10 most valuable companies and only 1 out of 10 (Wal-Mart) is associated with paying minimum or near-minimum wages.

    If we are going to adopt Marx’s Labor Theory of Value the only way that a company can get richer than its peers is by exploiting its workers. It actually looks as though it is companies that pay relatively high wages, such as Apple, IBM, Microsoft, and GE, are the most successful at exploiting workers (presumably by not paying them overtime, among other tactics).

  23. Anonymous

    March 22, 2014 @ 12:59 pm

    23

    If the OT rules have effects that one considers beneficial (e.g. increasing wages and/or reducing unemployment by spreading jobs to more workers) and adverse effects (e.g. increased cost/decreased flexibility for employers) then a cap is one way of capturing the benefits for those people who need them the most while limiting the adverse effects. Phil’s last post raises a very interesting point though; it may also focus the adverse effects on those employers who can least take them.

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