There Should Be Overtime Protection—and Pay—For Anyone Paid Less Than $51,000 a Year

In March 2014, President Obama directed Secretary of Labor Tom Perez to prepare an update of the regulations that govern exemptions from the Fair Labor Standards Act (FLSA) requirement that employers pay time-and-a-half for work beyond 40 hours in a week. The so-called “white collar” exemptions for professionals, executives, and administrators include a threshold salary below which every employee is guaranteed overtime pay regardless of his or her work duties. Above that salary level, the employer doesn’t have to pay anything for overtime hours—not even minimum wage—if the work performed meets certain criteria.

The salary threshold has rarely been increased, and since 1975, its real value has been eroded by inflation. It currently stands at $455 a week, or $23,660 a year—below the poverty level for a family of four and nothing like a true executive or professional salary. Whereas 65% of salaried workers were guaranteed overtime coverage by the salary threshold in 1975, just 11% are covered today.

In the past year, four significant proposals have been made to update the salary threshold, and each would guarantee coverage to a different number of workers. The figure and table below show that as the threshold increases, millions more employees are guaranteed overtime coverage.

The lowest proposal, for a threshold of $807 per week or $42,000 a year, is rumored to be under consideration at the Department of Labor (DOL). Jared Bernstein and I recommended a simple inflation adjustment of the 1975 threshold: $984 per week or $51,168 a year. In a paper for EPI, Heidi Shierholz suggested that $1,122 per week, or $58,344 a year, was appropriate because it would guarantee that the same share of salaried workers receive overtime protection as were protected in 1975—after adjusting for the different educational composition of the workforce today. The highest figure, proposed by Nick Hanauer, is $1,327 per week, or $69,004 a year. It represents the salary level that would cover the same share of salaried workers as in 1975, but without adjustments for changed demographics.

Table 1

Newly covered workers under various weekly earnings exemption thresholds compared to the current threshold of $455 and the share of those that are women, 2013

$807 ($41,964 annually) $984 ($51,168 annually) $1,122 ($58,344 annually) $1,327 ($69,004 annually)
Number newly covered (millions) 3.5 6.1 7.8 10.4
Newly covered as a share of currently exempt 16.1% 28.2% 36.0% 47.8%
Number of newly covered that are women (millions) 1.9 3.3 4.1 5.3
Share of newly covered that are women 55.7% 53.7% 52.5% 50.6%

Note: Calculations use only data on full-time salaried (i.e. non-hourly) workers. To isolate supervisory/managerial/professional salaried workers, observations are weighted by the share in each individual's occupation that is exempt from the overtime protections of the Fair Labor Standards Act based on the duties of the occupation, according to U.S. Department of Labor codes.

Source: EPI analysis of Current Population Outgoing Rotation Group microdata

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Interestingly, in all cases, a majority of the employees who would benefit from a higher salary threshold are women.

Congress gave DOL the responsibility to make sense of the FLSA’s vague provision that executives, administrators, and professionals should be exempt, to define (because Congress did not define the terms) just which employees are “employed in a bona fide executive, administrative or professional capacity.” It has always been the department’s position that a “bona fide” executive, administrator, or professional has to be paid an amount appropriate to that status. In a 1940 report, the Labor Department’s “most detailed official explanation of the purpose of the exclusion and the crucial function of the salary test in distinguishing between protected and unprotected employees,” DOL wrote:

“The term, “executive” implies a certain prestige, status, and importance… Indeed, if an employer states that a particular employee is of sufficient importance to his firm to be classified as an executive” employee and therefore exempt from the protections of the Act, the best single test of the employer’s good faith in attributing importance to the employee’s services is the amount of money he pays for them.”1

Executive pay has separated dramatically from the pay of average workers since the 1970’s—skyrocketing while ordinary workers’ wages stagnated. But the salary threshold that defines “executive” pay under the FLSA has not kept pace. CEO pay has increased 937 percent since 1978, and the ratio of CEO pay to average worker pay has increased ten-fold, from about 30-to-1 to almost 300-to-1. If the executive salary threshold under the FLSA had increased proportionately, it would have grown from around 1.5 times the median wage in 1975 to about 15 times the median wage, not less than the median wage as it is today.

Without even taking into account how dramatically executive pay has risen since the 1970’s, executive pay should be well above the median for all workers, the level at which half of all workers are paid more, and half less. When the Ford administration raised the salary threshold in 1975, it was 1.57 times the median wage. The median wage today is $16.70 per hour. Were we to update the threshold by applying that same ratio—1.57 times the median wage—the threshold would be around $1,050 on a weekly basis.

In short, the case is very strong for a substantial increase in the salary threshold, whether to $51,000, $58,000, or even $69,000 a year, and DOL will have to decide which salary best fits the modern executive and the important work such executives do. Even in rural Mississippi, a basic family budget for a family of four requires an annual income of $50,719. It’s hard to think that any true executive in the country, doing work of any substantial importance, isn’t paid far more.

1. U.S. Department of Labor, “Executive, Administrative, Professional…” Redfined: Report and Recommendations of the Presiding Officer at Hearings Preliminary to Redefinition, p. 8 (1940).